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How do IMF announcements affect financial markets in crises?: Evidence from forward exchange markets

  • Evrensel, Ayse
  • Kutan, Ali M.

We employ a theoretical model to interpret the liquidity and moral hazard effects of IMF support during a financial crisis. We then estimate the response of forward exchange markets to IMF-related announcements, using data on the 3-, 9-, and 12-month forward exchange rates. Our results indicate that the announcement of IMF negotiations is associated with a premium on the baht and the rupiah, where the premium is much larger on the latter. This result is largely consistent with the responses of stock and bond markets, especially when country-specific data are employed.

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File URL: http://www.sciencedirect.com/science/article/B7CRR-4S01WN2-1/1/e3b81c54fe4e9bac704d25eb5a14c796
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Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 4 (2008)
Issue (Month): 2 (June)
Pages: 121-134

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Handle: RePEc:eee:finsta:v:4:y:2008:i:2:p:121-134
Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

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  1. Corsetti, Giancarlo & Guimaraes, Bernardo & Roubini, Nouriel, 2006. "International lending of last resort and moral hazard: A model of IMF's catalytic finance," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 441-471, April.
  2. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The "Overborrowing Syndrome"," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
  3. Steven Phillips & Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
  4. Zwart, Sanne, 2007. "The mixed blessing of IMF intervention: Signalling versus liquidity support," Journal of Financial Stability, Elsevier, vol. 3(2), pages 149-174, July.
  5. Ali Kutan & Brasukra Sudjana, 2003. "Investor reaction to IMF actions in the indonesian financial crisis," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 6(3), pages 181-190.
  6. Evrensel, Ayse Y. & Kutan, Ali M., 2006. "Creditor moral hazard in stock markets: Empirical evidence from Indonesia and Korea," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 640-654, June.
  7. Barry Eichengreen, 2005. "The IMF in a World of Private Capital Markets," Working Papers id:48, eSocialSciences.
  8. Evrensel, Ayse Y. & Kutan, Ali M., 2007. "IMF-related announcements and stock market returns: Evidence from financial and non-financial sectors in Indonesia, Korea, and Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 15(1), pages 80-104, January.
  9. Evrensel, Ayse Y. & Kutan, Ali M., 2008. "Impact of IMF-related news on capital markets: Further evidence from bond spreads in Indonesia and Korea," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(2), pages 147-160, April.
  10. Sarno, Lucio & Taylor, Mark P., 1999. "Moral hazard, asset price bubbles, capital flows, and the East Asian crisis:: the first tests," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 637-657, August.
  11. Ashoka Mody & Barry J. Eichengreen & Kenneth Kletzer, 2005. "The IMF in a World of Private Capital Markets," IMF Working Papers 05/84, International Monetary Fund.
  12. Ross McLeod, 2000. "Survey of Recent Developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 36(2), pages 5-41.
  13. Hayo, Bernd & Kutan, Ali M., 2005. "IMF-related news and emerging financial markets," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1126-1142, November.
  14. Stephen Grenville, 2004. "The IMF and the Indonesian crisis," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 40(1), pages 77-94.
  15. Stephen Grenville, 2000. "Monetary Policy and the Exchange Rate During the Crisis," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 36(2), pages 43-60.
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