Exchange market pressure and absorption by international reserves: Emerging markets and fear of reserve loss during the 2008–2009 crisis
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 deprecation rather than reserve loss to absorb most of the exchange market pressure shock. This could reflect a deliberate choice (“fear of reserve loss”) or market actions that caused very rapid exchange rate adjustment, especially in emerging markets with open capital markets, overwhelming policy actions.
Volume (Year): 31 (2012)
Issue (Month): 5 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/inca/30443|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Guillermo A. Calvo & Carmen M. Reinhart, 2002.
"Fear of Floating,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 117(2), pages 379-408.
- Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
- Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
- Obstfeld, Maurice, 2010. "The immoderate world economy," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 603-614, June.
- Aizenman, Joshua & Sun, Yi, 2012. "The financial crisis and sizable international reserves depletion: From ‘fear of floating’ to the ‘fear of losing international reserves’?," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 250-269.
- Joshua Aizenman & Yi Sun, 2009. "The Financial Crisis and Sizable International Reserves Depletion: From 'Fear of Floating' to the 'Fear of Losing International Reserves'?," Working Papers 382009, Hong Kong Institute for Monetary Research.
- 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.
- Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-548, September.
- Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
- Jeffrey A. Frankel, 2009. "New Estimation Of China'S Exchange Rate Regime," Pacific Economic Review, Wiley Blackwell, vol. 14(3), pages 346-360, 08.
- Frankel, Jeffrey, 2008. "New Estimation of China's Exchange Rate Regime," Working Paper Series rwp08-077, Harvard University, John F. Kennedy School of Government.
- Jeffrey A. Frankel, 2009. "New Estimation of China's Exchange Rate Regime," NBER Working Papers 14700, National Bureau of Economic Research, Inc.
- 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. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:31:y:2012:i:5:p:1076-1091. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.