International Finance and Emerging Markets
Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM
- Chair: Helene Rey, London Business School
A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies
AbstractThis paper examines the claim that exchange rate regimes are of little salience in the transmission of global financial conditions to domestic financial and macroeconomic conditions by focusing on a sample of about 40 emerging market countries over 1986–2013. Our findings show that exchange rate regimes do matter. Countries with fixed exchange rate regimes are more likely to experience financial vulnerabilities (faster domestic credit and house price growth, and increase in bank leverage) than those with relatively flexible regimes. The transmission of global financial shocks is likewise magnified under fixed regimes relative to more flexible regimes. We attribute this to both reduced monetary policy autonomy and a greater sensitivity of capital flows to changes in global conditions under fixed exchange rate regimes.
Optimal Payment Areas or Optimal Currency Areas?
AbstractThe Optimal Currency Areas (OCA) theory proposed by Mundell (1961) is framed in terms of a transactions cost minimization analysis. OCA argues that countries using the same currency as a payment for trade can reduce foreign-exchange related transaction costs. We argue that a nation's currency is like a corporation's equity. By extending our model of a single open-economy in “The Capital Structure of Nations” (Bolton & Huang, 2018a) to include multiple countries, we formulate an alternative OCA theory, that ties money to sovereignty. Whether two economically integrated nations should form an optimal currency area depends on the tradeoff between financial flexibility (the value of monetary sovereignty) and monetary discipline (the commitment not to engage in competitive monetizations). The original OCA is, in effect, a theory of Optimal Payment Areas, while our theory, that expresses monetary union as a transfer of sovereignty, truly is a theory of optimal currency areas.
Financial Cycles in Emerging Economies
AbstractIn Coimbra and Rey (2017) we develop a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. It features time-varying endogenous macroeconomic risk that arises from the risk-shifting behaviour of financial intermediaries combined with entry and exit. We analyse how decreases in funding costs of emerging markets financial systems may lead to increase financial fragility in those markets when the world real rate is low. We empirically study the implications of our model for a cross section of emerging markets.
- F3 - International Finance