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Exchange Market Pressure and Absorption by International Reserves: Emerging Markets and Fear of Reserve Loss During the 2008-09 Crisis

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  • Joshua Aizenman
  • Michael M. Hutchison

Abstract

This paper evaluates how the global financial crisis emanating from the U.S. was transmitted to emerging markets. Our focus is on the extent that the crisis caused external market pressures (EMP), and whether the absorption of the shock was mainly through exchange rate depreciation or the loss of international reserves. Controlling for variety of factors associated with EMP, we find clear evidence that emerging markets with higher total foreign liabilities, including short- and long-term debt, equities, FDI and derivative products—had greater exposure and were much more vulnerable to the financial crisis. Countries with large balance sheet exposure -- high external portfolio liabilities exceeding international reserves—absorbed the global shock by allowing greater exchange rate depreciation and comparatively less reserve loss. Despite the remarkable buildup of international reserves by emerging markets during the period prior to the financial crisis, countries relied primarily on exchange rate depreciation rather than reserve loss to absorb most of the exchange market pressure shock. This could reflect a deliberate choice (“fear of reserve loss” or competitive depreciations) or market actions that caused very rapid exchange rate adjustment, especially in emerging markets with open capital markets, overwhelming policy actions.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16260.

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Date of creation: Sep 2010
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Publication status: published as “"Exchange Market Pressure and Absorption by International Reserves: Emerging Markets and Fear of Reserve Loss During the 2008-09 Crisis," (with M. Hutchison), Journal of International Money and Finance, 2012, 31, 5, pp. 1076-1091
Handle: RePEc:nbr:nberwo:16260

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  1. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, Elsevier, vol. 49(6), pages 1603-1635, August.
  2. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  3. Jeffrey A. Frankel, 2009. "New Estimation Of China'S Exchange Rate Regime," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 14(3), pages 346-360, 08.
  4. Joshua Aizenman & Yi Sun, 2009. "The financial crisis and sizable international reserves depletion: From 'fear of floating' to the 'fear of losing international reserves'?," NBER Working Papers 15308, National Bureau of Economic Research, Inc.
  5. Stephan Danninger & Irina Tytell & Ravi Balakrishnan & Selim Elekdag, 2009. "The Transmission of Financial Stress From Advanced to Emerging Economies," IMF Working Papers 09/133, International Monetary Fund.
  6. Obstfeld, Maurice & Rogoff, Kenneth, 2009. "Global imbalances and the financial crisis: products of common causes," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Oct, pages 131-172.
  7. Obstfeld, Maurice, 2010. "The immoderate world economy," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(4), pages 603-614, June.
  8. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, American Economic Association, vol. 67(4), pages 537-48, September.
  9. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
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Cited by:
  1. Robert N. McCauley, 2013. "Risk-On/Risk-Off, Capital Flows, Leverage, and Safe Assets," Finance Working Papers 23390, East Asian Bureau of Economic Research.
  2. Laura Alfaro & Fabio Kanczuk, 2013. "Carry Trade, Reserve Accumulation, and Exchange-Rate Regimes," NBER Working Papers 19098, National Bureau of Economic Research, Inc.
  3. Cheng, G., 2013. "A Growth Perspective on Foreign Reserve Accumulation," Working papers, Banque de France 443, Banque de France.
  4. Luis Servén & Ha Nguyen, 2013. "Global Imbalances: Origins and Prospects," World Bank Research Observer, World Bank Group, World Bank Group, vol. 28(2), pages 191-219, August.

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