Measuring the Degree of Currency Misalignment Using Offshore Forward Exchange Rates: The Case of the Korean Financial Crisis

This paper proposes a new method of measuring the degree of currency misalignment through the use of offshore forward exchange rates. Using default risk adjusted no­arbitrage conditions for forward exchange contracts, we calculate the spot exchange rates and the domestic interest rates that are implied from the observed forward exchange rates. The difference between the implied and the observed spot exchange rates is our measure of currency misalignment. Our methodology is based on the presumption that, during a currency crisis, offshore forward exchange rates reflect market sentiments more closely than onshore spot and forward exchange rates. The latter are usually tightly regulated and heavily affected by government intervention during a non­normal event such as a financial crisis. We apply the method to the Korean financial crisis in 1997 and discuss its implication for evaluating the IMF adjustment program and explaining foreign capital flows.currency misalignment, covered interest parity, non­deriverable forwards, Korean financial crisis

The Stock Market, Profit and Investment

Should managers, when making investment decisions, follow the signals given by the stock market even if those do not coincide with their own assessments of fundamental value? This paper reviews the theoretical arguments and examines the empirical evidence, constructing and using a new US time series of data on the q ratio from 1900 to 1988. We decompose q - - the ratio of the market value of corporate capital to its replacement cost - - into the product of two terms, reflecting "fundamentals" and "valuation", the ratio of market value to fundamentals. We then examine the relation of investment to each of the two, using a number of alternative proxies for fundamentals. We interpret our results as pointing, strongly but not overwhelmingly, to a larger role of "fundamentals" than of "valuation" in investment decisions.

Social Impacts of the Asian Crisis: Policy Challenges and Lessons

human development, economic growth, globalization, inequality, poverty

Trends in Unemployment Rates in Korea: A Search-Matching Model Interpretation

We investigate the steady decline in aggregate unemployment rates in Korea since the 1960's. We argue that a pronounced decrease in the intensity of reallocation shocks, which resulted in a downward trend in the natural rate of unemployment, has been an important factor in this decline. Our claim is based on a structural search-matching model, the times series of job-separation and job-finding rates, and sectoral-shift measures that we construct from a micro data for the past three decades.Unemployment rates in Korea, Search, Reallocation shocks

Manufacturing Matters...but It's the Jobs That Count

This paper asks, first, whether today's developing economies can achieve high-income status without first building large manufacturing sectors. We find that practically every economy that enjoys a high income today experienced a manufacturing employment share in excess of 18%-20% sometime since the 1970s. Manufacturing output share thresholds are much poorer predictors of rich-country status than their employment counterparts. This motivates us to ask whether it is becoming more difficult to sustain high levels of manufacturing activity. We find that the maximum expected employment share for a typical developing economy has fallen to around 13%-15%, and that deindustrialization in employment sets in at much lower income per capita levels of $8,000-$9,000, than it once did. Neither manufacturing output shares, nor the level of income at which they decline have fallen as obviously. These results are consistent with the idea that industrialization in employment terms has been more important for eventual prosperity than has industrialization in output terms; and that high manufacturing employment shares are becoming more difficult to sustain as incomes rise. This suggests that the path to prosperity through industrialization may have become more difficult

Global and regional financial safety nets: Lessons from Europe and Asia

The Asian financial crisis (1997) and the European crisis (2009) have both contributed to the development and deepening of regional safety net arrangements. This paper analyses the relationships between global and regional financial safety nets, and uncovers the potential tensions and operational challenges associated with the involvement of several institutional players with potentially different interests, analytical biases and governance. The G20 has acknowledged the importance of these new players for the international monetary system, but the principles for cooperation between the IMF and regional financing arrangements are far too broad and ad hoc to contribute to a coherent and effective architecture. This paper tries to establish some lessons learned from the Asian financial crisis in 1997 and the current European crisis in order to enhance the effectiveness, efficiency, equity and governance of these arrangements. In particular, it proposes changes to the IMF articles of agreement to allow for lending or guarantees to regional arrangements directly and it establishes some key desirable features and practices of regional mechanisms that should be adopted everywhere to ensure some global consistency, particularly in the field of macroeconomic surveillance, programme design and conditionality

Ending "Too Big To Fail": Government Promises versus Investor Perceptions

Can a government credibly promise not to bailout firms whose failure would have major negative systemic consequences? Our analysis of the Republic of Korea's 1997–1999 crisis, suggests an answer: No. Despite a general "no bailout" policy during the crisis, the largest Korean corporate groups (chaebol)―facing severe financial and governance problems―could still borrow heavily from households through issuing bonds at prices implying very low expected default risk. The evidence suggests "too big to fail" beliefs were not eliminated by government promises, presumably because investors believed that this policy was not time consistent. Subsequent government handling of potential and actual defaults by Daewoo and Hyundai confirmed the market view that creditors would be protected