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Balance sheet effects on monetary and financial spillovers: The East Asian crisis plus 20

Listed author(s):
  • Aizenman, Joshua
  • Chinn, Menzie D.
  • Ito, Hiro

We study how the financial conditions in the Center Economies [the U.S., Japan, and the Euro area] impact other countries over the period 1986 through 2015. Our methodology relies upon a two-step approach. We focus on five possible linkages between the center economies (CEs) and the non-Center economics, or peripheral economies (PHs), and investigate the strength of these linkages. For each of the five linkages, we first regress a financial variable of the PHs on financial variables of the CEs while controlling for global factors. Next, we examine the determinants of sensitivity to the CEs as a function of country-specific macroeconomic conditions and policies, including the exchange rate regime, currency weights, monetary, trade and financial linkages with the CEs, the levels of institutional development, and international reserves. Extending our previous work (Aizenman et al., 2016), we devote special attention to the impact of currency weights in the implicit currency basket, balance sheet exposure, and currency composition of external debt. We find that for both policy interest rates and the real exchange rate (REER), the link with the CEs has been pervasive for developing and emerging market economies in the last two decades, although the movements of policy interest rates are found to be more sensitive to global financial shocks around the time of the emerging markets’ crises in the late 1990s and early 2000s, and since 2008. When we estimate the determinants of the extent of connectivity, we find evidence that the weights of major currencies, external debt, and currency compositions of debt are significant factors. More specifically, having a higher weight on the dollar (or the euro) makes the response of a financial variable such as the REER and exchange market pressure in the PHs more sensitive to a change in key variables in the U.S. (or the euro area) such as policy interest rates and the REER. While having more exposure to external debt would have similar impacts on the financial linkages between the CEs and the PHs, the currency composition of international debt securities does matter. Economies more reliant on dollar-denominated debt issuance tend to be more vulnerable to shocks emanating from the U.S.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 74 (2017)
Issue (Month): C ()
Pages: 258-282

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Handle: RePEc:eee:jimfin:v:74:y:2017:i:c:p:258-282
DOI: 10.1016/j.jimonfin.2017.02.020
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
  2. Kristin J. Forbes & Menzie D. Chinn, 2004. "A Decomposition of Global Linkages in Financial Markets Over Time," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 705-722, August.
  3. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2005. "The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 423-438, August.
  4. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-484, December.
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  6. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
  7. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2016. "Monetary policy spillovers and the trilemma in the new normal: Periphery country sensitivity to core country conditions," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 298-330.
  8. Hausmann Ricardo & Panizza Ugo, 2011. "Redemption or Abstinence? Original Sin, Currency Mismatches and Counter Cyclical Policies in the New Millennium," Journal of Globalization and Development, De Gruyter, vol. 2(1), pages 1-35, August.
  9. Chinn, Menzie D. & Ito, Hiro, 2007. "Current account balances, financial development and institutions: Assaying the world "saving glut"," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 546-569, June.
  10. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises; The Good, the Bad, and the Ugly," IMF Working Papers 10/146, International Monetary Fund.
  11. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2011. "Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 290-320, September.
  12. Aizenman, Joshua & Ito, Hiro, 2014. "Living with the trilemma constraint: Relative trilemma policy divergence, crises, and output losses for developing countries," Journal of International Money and Finance, Elsevier, vol. 49(PA), pages 28-51.
  13. 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, vol. 29(4), pages 615-641, June.
  14. Ito, Hiro & Kawai, Masahiro, 2012. "New Measures of the Trilemma Hypothesis: Implications for Asia," ADBI Working Papers 381, Asian Development Bank Institute.
  15. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
  16. Atish R Ghosh & Jonathan D Ostry & Mahvash S Qureshi, 2015. "Exchange Rate Management and Crisis Susceptibility: A Reassessment," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(1), pages 238-276, May.
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  19. Ito, Hiro & Kawai, Masahiro, 2016. "Trade invoicing in major currencies in the 1970s–1990s: Lessons for renminbi internationalization," Journal of the Japanese and International Economies, Elsevier, vol. 42(C), pages 123-145.
  20. Eichengreen, Barry & Gupta, Poonam, 2015. "Tapering talk: The impact of expectations of reduced Federal Reserve security purchases on emerging markets," Emerging Markets Review, Elsevier, vol. 25(C), pages 1-15.
  21. Joshua Aizenman & Hiro Ito, 2016. "East Asian Economies and Financial Globalization In the Post-Crisis World," NBER Working Papers 22268, National Bureau of Economic Research, Inc.
  22. Rey, Helene, 2013. "Dilemma not trilemma: the global cycle and monetary policy independence," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 1-2.
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  24. Joshua Aizenman & Menzie David Chinn & Hiro Ito, 2013. "The “Impossible Trinity” Hypothesis in an Era of Global Imbalances: Measurement and Testing," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 447-458, August.
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