A Large Speculator in Contagious Currency Crises

This paper studies the implications of the presence of a large speculator like George Soros during a contagious currency crisis. The model proposes a new contagion channel and shows how a currency crisis can spread from one country to another even when these countries are totally unrelated in terms of economic fundamentals. This model enables us to distinguish between whether a crisis is a coincidence or due to contagion when it happens in two countries. It finds that the better the economic fundamentals in the originating crisis country, the more severe the contagion under certain conditions. The large speculator is more aggressive in attacking the currency peg than he would be if his size were small. Furthermore, the mere presence of the large speculator makes other small speculators more aggressive in attacking the currency peg, which in turn makes countries more vulnerable to currency crises. But surprisingly, the presence of the large speculator mitigates contagion of crises across countries. The model presents policy implications as to financial disclosure and size regulation of speculators such as hedge funds, which recently have been hot topics among policy makers. First, financial disclosure by speculators eliminates contagion, but may make countries more vulnerable to crises. Second, regulating the size of speculators (e.g., prohibiting hedge funds from high-leverage and thereby limiting the amount of short-selling) makes countries less vulnerable to crises, but makes contagion more severeContagion; Currency Crises; George Soros; Global Game

Contagion of Currency Crises across Unrelated Countries without Common Lender

I construct a micro-model to show that a currency crisis can spread from one country to another even when these countries are unrelated in terms of economic fundamentals and there is no capital linkage across countries through a common lender or an interbank market. The key to explaining contagious currency crises in the model lies in each speculator's private information and learning behavior about other speculators' type. Since the payoff of each speculator depends on other speculators' behavior determined by their types, each speculator's behavior depends on her belief about other speculators' types. If a currency crisis in one country reveals the speculators' types to some degree, it leads to an updating of each speculator's belief about other speculators' types and therefore a change in her optimal behavior, which in turn can cause a currency crisis even in another unrelated country without capital linkage. Although the presence of contagion itself is not new in the literature, there is an important implication difference between the literature and this paper. The model shows that the crisis with better economic fundamentals can be more contagious than that with worse economic fundamentals; this has not been shown in the literature. This is because the former conveys information about types of speculators while the latter does not. Even if country B does not suffer from a contagious crisis due to bad economic fundamentals from country A, it does not necessarily mean that it will never suffer contagion from some other country with better economic fundamentals than country AContagion; Currency Crises; Global Game

Lending Channels and Financial Shocks: The Case of Small and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis

We offer a new paradigm for understanding the impact of financial shocks on the flow of credit to small and medium-sized enterprises (SMEs). Drawing from research on the lending view of monetary policy and research on SME financial contracting, we introduce the concept of glending channels.h A lending channel is a two-dimensional conduit through which SMEs obtain financing. In particular, a lending channel consists of a specific lending technology provided by a specific type of institution. We hypothesize that during financial shocks some lending channels may close and other channels may expand to absorb the slack. We empirically test a possible implication of this hypothesis by examining whether one lending channel, trade credit, played a significant role as a substitute for other lending channels in offsetting a contraction in SME lending of other lending channels during the Japanese financial crisis. We find little evidence that trade credit played such a role. To the contrary, we find some evidence that trade credit and financial institution lending are complements, rather than substitutes, during the Japanese financial crisis periods. This does not preclude the possibility that other lending channels may have behaved in a manner consistent with this hypothesis.Trade credit; Credit crunch

ASSESSMENT OF WEYMARK'S MEASURES OF EXCHANGE MARKET INTERVENTION: THE CASE OF JAPAN

This paper assesses the validity of the index of foreign exchange market intervention proposed by Weymark. We construct the Weymark index for Japan and then compare it with Japanese public intervention data to evaluate its performance. The results suggest that research using the Weymark index should be interpreted with caution. Copyright 2007 The Authors Journal compilation 2007 Blackwell Publishing Ltd

Experimental analysis on the role of a large speculator in currency crises

Corsetti et al. (2004) demonstrate that the presence of a large speculator in the foreign exchange market makes the remaining traders more aggressive in their speculative attacks. We conduct an experiment designed to test their theoretical predictions and also use the experiment to analyze an additional aspect that has not been previously covered in the literature: namely, whether the entry of a large speculator and the exit of the same speculator have the same effect in magnitude on the probability of a successful speculative attack. We obtain two main findings. First, the results support the main conclusion of Corsetti et al. (2004) that the presence of a large speculator makes other small speculators more aggressive. Second, the results suggest that the effect of the entry of a large speculator on the probability of successful speculative attacks is larger than that of the exit of the same speculator.Currency crises Global game Experimental economics