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Risk and Asian Exchange Rate Regimes

  • Ashima Goyal
  • Ankita Agarwal

A panel regression gives evidence that more flexibility in Asian exchange rates reduces risk associated with bank borrowing abroad, but deviations from mean exchange rates, and from the renminbi, increase risk. Since the exchange rate regime affects bank behavior and the incentives to hedge, the results broadly support the bank run over the moral hazard view of twin banking and currency crisis. The results suggest that flexibility in exchange rates is required for Asian EMEs, but the flexibility has to be limited, and it depends on more flexibility in the renminbi. This has implications for current global imbalances in reserves and feasible adjustment paths.

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Article provided by Taylor & Francis Journals in its journal Global Economic Review.

Volume (Year): 34 (2005)
Issue (Month): 3 ()
Pages: 321-329

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Handle: RePEc:taf:glecrv:v:34:y:2005:i:3:p:321-329
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  1. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "Paper tigers?: A model of the Asian crisis," European Economic Review, Elsevier, vol. 43(7), pages 1211-1236, June.
  2. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2001. "Hedging and financial fragility in fixed exchange rate regimes," European Economic Review, Elsevier, vol. 45(7), pages 1151-1193.
  3. Roberto Chang & Andrés Velasco, 2000. "Liquidity Crises in Emerging Markets: Theory and Policy," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 11-78 National Bureau of Economic Research, Inc.
  4. Goyal, Ashima, 2005. "Asian reserves and the dollar: Is gradual adjustment possible?," MPRA Paper 29979, University Library of Munich, Germany.
  5. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers.
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