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From the Great Moderation to the global crisis: Exchange market pressure in the 2000s

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  • Joshua Aizenman
  • Jaewoo Lee
  • Vladyslav Sushko

Abstract

This paper investigates the factors explaining exchange market pressures (EMP) and the hoarding and use of international reserves (IR) by emerging markets during the 2000s, as the Great Moderation turned to the 2008-9 global crisis and great recession. According to our results, both financial and trade factors played important roles, yet the relative magnitude of financial considerations dominated, both during the Great Moderation and during the crisis. The coefficient of gross short-term external debt quintuples during the onset of the crisis, and then gradually declines as we let the crisis window roll forward. Capital outflow (induced by global deleveraging) was the force behind the emerging markets EMP rise during the global financial crisis, with the emerging markets’ stock markets themselves only playing a secondary role. In addition, emerging markets were greatly affected by the fall in commodity prices during the initial phase of the crisis, although the relative impact of trade factors remained virtually the same in magnitude during the financial crisis and the Great Moderation period that preceded it. We also study the association between several country-level indicators, as of 2007, and the EMP measure during the height of the crisis in 2008:Q4 in a cross sectional regression. We found that that richer EMs experienced greater EMP during the crisis. Greater FDI inflows prior to the crisis were associated with a lower crisis EMP, while greater portfolio debt inflows with a higher crisis EMP, and this effect is much larger than the mitigation effect associated with greater FDI inflows. We conclude with an analysis of the factors that account for the trade and financial exposure of emerging markets during the crisis, finding that pre-crisis financial and trade openness are significant predictors of the financial and trade shock during the crisis. The severity of the financial shock was further exacerbated by financial ties to the U.S., while the trade shock was more severe in EMs with a larger commodity export share.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16447.

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Date of creation: Oct 2010
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Publication status: published as Joshua Aizenman & Jaewoo Lee & Vladyslav Sushko, 2012. "From the Great Moderation to the Global Crisis: Exchange Market Pressure in the 2000s," Open Economies Review, Springer, vol. 23(4), pages 597-621, September.
Handle: RePEc:nbr:nberwo:16447

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  1. Rose, Andrew K. & Spiegel, Mark M., 2011. "Cross-country causes and consequences of the crisis: An update," European Economic Review, Elsevier, Elsevier, vol. 55(3), pages 309-324, April.
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  7. International Monetary Fund, 2009. "Commodity Terms of Trade," IMF Working Papers, International Monetary Fund 09/205, International Monetary Fund.
  8. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2010. "The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(4), pages 615-641, June.
  9. Kimura, Fukunari & Takahashi, Yuya & Hayakawa, Kazunobu, 2007. "Fragmentation and parts and components trade: Comparison between East Asia and Europe," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 18(1), pages 23-40, February.
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Cited by:
  1. Jesús Crespo Cuaresma & Martin Feldkircher, 2012. "Drivers of Output Loss during the 2008–09 Crisis: A Focus on Emerging Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 46-64.
  2. Feldkircher, Martin, 2012. "The Determinants of Vulnerability to the Global Financial Crisis 2008 to 2009: Credit Growth and Other Sources of Risk," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 26/2012, Bank of Finland, Institute for Economies in Transition.
  3. Josef Schreiner, 2012. "Developments in Selected CESEE Countries: Heterogeneous Growth Performance, Improving Fiscal and External Accounts," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 8-37.
  4. Martin Feldkircher & Roman Horvath & Marek Rusnak, 2013. "Exchange Market Pressures during the Financial Crisis: A Bayesian Model Averaging Evidence," Working Papers, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies) 332, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  5. Sengupta, Rajeswari & Sen Gupta, Abhijit, 2013. "Policy Tradeoffs in an Open Economy and the Role of G-20 in Global Macroeconomic Policy Coordination," MPRA Paper 53948, University Library of Munich, Germany, revised 12 Jul 2013.
  6. Sen Gupta, Abhijit & Sengupta, Rajeswari, 2013. "Management of Capital Flows in India: 1990-2011," MPRA Paper 46217, University Library of Munich, Germany.
  7. Filardo , Andrew J. & Siklos , Pierre L., 2013. "Prolonged reserves accumulation, credit booms, asset prices and monetary policy in Asia," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 5/2013, Bank of Finland, Institute for Economies in Transition.

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