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An alternative framework for foreign exchange risk management of sovereign debt

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  • Melecky, Martin

Abstract

This paper proposes a measure of synchronization in the movements of relevant domestic and foreign fundamentals for choosing suitable currency for denomination of foreign debt. The selection of explanatory variables for exchange rate volatility is motivated using a New Keynesian Policy model. The model predicts that not only traditional optimal currency area variables, but also variables considered by the literature on currency preferences, such as money velocity, should be relevant for explaining exchange rate volatility. The findings show that measures of inflation synchronization, money velocity synchronization, and interest rate synchronization can be useful indicators for decisions on the currency denomination of foreign debt.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4458.

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Date of creation: 01 Jan 2008
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Handle: RePEc:wbk:wbrwps:4458

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Keywords: Debt Markets; Emerging Markets; Currencies and Exchange Rates; Economic Theory&Research;

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  1. Fernando Broner & Guido Lorenzoni & Sergio L. Schmukler, 2003. "Why do emerging economies borrow short term?," Economics Working Papers 838, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2011.
  2. Giavazzi, Francesco & Missale, Alessandro, 2004. "Public Debt Management in Brazil," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4293, C.E.P.R. Discussion Papers.
  3. Brittain, Bruce, 1981. "International Currency Substitution and the Apparent Instability of Velocity in Some Western European Economies and in the United States," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 13(2), pages 135-55, May.
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  6. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications, Inter-American Development Bank, Research Department 4205, Inter-American Development Bank, Research Department.
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  8. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2139, C.E.P.R. Discussion Papers.
  9. Bayoumi, Tamim & Eichengreen, Barry, 1998. "Exchange Rate Volatility and Intervention: Implications of the Theory of Optimum Currency Areas," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1982, C.E.P.R. Discussion Papers.
  10. Kingston, Geoffrey & Melecky, Martin, 2007. "Currency preferences and the Australian dollar," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(3), pages 454-467, April.
  11. Charles Engel & Kenneth D. West, 2003. "Exchange rates and fundamentals," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  12. Ricardo Caballero & Kevin Cowan, 2006. "Financial Integration Without the Volatility," Working Papers Central Bank of Chile, Central Bank of Chile 387, Central Bank of Chile.
  13. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 841-58, September.
  14. Sebastian Edwards & Roberto Rigobon, 2005. "Capital Controls, Exchange Rate Volatility and External Vulnerability," NBER Working Papers 11434, National Bureau of Economic Research, Inc.
  15. Philip Turner, 2002. "Bond markets in emerging economies: an overview of policy issues," BIS Papers chapters, in: Bank for International Settlements (ed.), The development of bond markets in emerging economies, volume 11, pages 1-12 Bank for International Settlements.
  16. Bohn, Henning, 1990. "A positive theory of foreign currency debt," Journal of International Economics, Elsevier, Elsevier, vol. 29(3-4), pages 273-292, November.
  17. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc.
  18. Tsionas, Efthymios G., 2001. "P-STAR analysis in a converging economy: the case of Greece," Economic Modelling, Elsevier, Elsevier, vol. 18(1), pages 49-60, January.
  19. Melecky, Martin, 2007. "Choosing the currency structure for sovereign debt : a review of current approaches," Policy Research Working Paper Series 4246, The World Bank.
  20. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, American Economic Association, vol. 80(5), pages 1217-30, December.
  21. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series, European Central Bank 0042, European Central Bank.
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