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Balance of Payments Anti-Crises

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  • Isabel K. Yan
  • Michael Kumhof

Abstract

Several emerging economies have, until recently, experienced large government surpluses and accelerating foreign exchange reserve accumulation. This has been accompanied by economic booms, exchange rate appreciations and in some cases increases in domestic inflation. We show that one way to understand these episodes is as manifestations of balance of payments anti-crises, as reflecting the perception that the government intends to discontinue its accumulation of reserves in the near future. The end-phase of such crises is characterized by nominal interest rates approaching their zero lower bound in accelerating fashion and, if the government targets CPI inflation, by fast increasing domestic inflation.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/134.

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Length: 22
Date of creation: 01 Jun 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/134

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Related research

Keywords: Foreign exchange reserves; Current account surpluses; Data analysis; Economic models; Emerging markets; Exchange rate appreciation; Reserves accumulation; inflation; foreign exchange; exchange rate; inflation targeting; exchange reserves; exchange rate targeting; exchange rate depreciation; real money; nominal exchange rate; nominal interest rate; nominal interest rates; relative price; inflation rates; monetary policy; money supply; foreign currency; real exchange rate; exchange purchases; price level; inflation dynamics; lower inflation; real variables; foreign exchange purchases; inflation tax; real value; real wages; foreign exchange market; inflation target; exchange markets; exchange rate volatility; current account balance; money growth; inflation stabilization; real interest rates; currency appreciation; foreign exchange markets; inflation rate; exchange rate appreciations; monetary base; reduction in inflation;

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  1. Kumhof, Michael & Li, Shujing & Yan, Isabel, 2007. "Balance of payments crises under inflation targeting," Journal of International Economics, Elsevier, vol. 72(1), pages 242-264, May.
  2. Calvo, Guillermo A. & Vegh, Carlos A., 1999. "Inflation stabilization and bop crises in developing countries," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 24, pages 1531-1614 Elsevier.
  3. Calvo, Guillermo A, 1987. "Balance of Payments Crises in a Cash-in-Advance Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 19-32, February.
  4. Enrique G. Mendoza, 2005. "Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies," NBER Working Papers 11691, National Bureau of Economic Research, Inc.
  5. Herman Kamil, 2008. "Is Central Bank Intervention Effective Under Inflation Targeting Regimes? the Case of Colombia," IMF Working Papers 08/88, International Monetary Fund.
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