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From the Great Moderation to the global crisis: Exchange market pressure in the 2000s

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  • Aizenman, Joshua
  • Lee, Jaewoo
  • Sushko, Vladyslav

Abstract

This paper investigates the factors explaining exchange market pressures (EMP) and thehoarding and use of international reserves (IR) by emerging markets during the 2000s, as the GreatModeration turned to the 2008-9 global crisis and great recession. According to our results, bothfinancial and trade factors played important roles, yet the relative magnitude of financial considerationsdominated, both during the Great Moderation and during the crisis. The coefficient of gross short-termexternal debt quintuples during the onset of the crisis, and then gradually declines as we let the crisiswindow roll forward. Capital outflow (induced by global deleveraging) was the force behind theemerging markets EMP rise during the global financial crisis, with the emerging markets’ stock marketsthemselves only playing a secondary role. In addition, emerging markets were greatly affected by thefall in commodity prices during the initial phase of the crisis, although the relative impact of tradefactors remained virtually the same in magnitude during the financial crisis and the Great Moderationperiod that preceded it. We also study the association between several country-level indicators, as of2007, and the EMP measure during the height of the crisis in 2008:Q4 in a cross sectional regression.We found that that richer EMs experienced greater EMP during the crisis. Greater FDI inflows prior tothe crisis were associated with a lower crisis EMP, while greater portfolio debt inflows with a highercrisis EMP, and this effect is much larger than the mitigation effect associated with greater FDI inflows.We conclude with an analysis of the factors that account for the trade and financial exposure ofemerging markets during the crisis, finding that pre-crisis financial and trade openness are significantpredictors of the financial and trade shock during the crisis. The severity of the financial shock wasfurther exacerbated by financial ties to the U.S., while the trade shock was more severe in EMs with alarger commodity export share.

Suggested Citation

  • Aizenman, Joshua & Lee, Jaewoo & Sushko, Vladyslav, 2010. "From the Great Moderation to the global crisis: Exchange market pressure in the 2000s," Santa Cruz Department of Economics, Working Paper Series qt8c75z2pt, Department of Economics, UC Santa Cruz.
  • Handle: RePEc:cdl:ucscec:qt8c75z2pt
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    References listed on IDEAS

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    Cited by:

    1. Andrew J. Filardo & Pierre L. Siklos, 2016. "Prolonged Reserves Accumulation, Credit Booms, Asset Prices and Monetary Policy in Asia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(2), pages 364-381, February.
    2. Sengupta, Rajeswari & Sen Gupta, Abhijit, 2013. "Policy Tradeoffs in an Open Economy and the Role of G-20 in Global Macroeconomic Policy Coordination," MPRA Paper 53948, University Library of Munich, Germany, revised 12 Jul 2013.
    3. Sen Gupta, Abhijit & Sengupta, Rajeswari, 2013. "Management of Capital Flows in India: 1990-2011," MPRA Paper 46217, University Library of Munich, Germany.
    4. Aizenman, Joshua & Binici, Mahir, 2016. "Exchange market pressure in OECD and emerging economies: Domestic vs. external factors and capital flows in the old and new normal," Journal of International Money and Finance, Elsevier, vol. 66(C), pages 65-87.
    5. Feldkircher, Martin & Horvath, Roman & Rusnak, Marek, 2014. "Exchange market pressures during the financial crisis: A Bayesian model averaging evidence," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 21-41.
    6. Feldkircher, Martin, 2014. "The determinants of vulnerability to the global financial crisis 2008 to 2009: Credit growth and other sources of risk," Journal of International Money and Finance, Elsevier, vol. 43(C), pages 19-49.
    7. Robert Dixon & Zhichao Zhang & Yang Dai, 2016. "Exchange Rate Flexibility in China: Measurement, Regime Shifts and Driving Forces of Change," Review of International Economics, Wiley Blackwell, vol. 24(5), pages 875-892, November.
    8. Siklos, Pierre L., 2011. "Emerging market yield spreads: Domestic, external determinants, and volatility spillovers," Global Finance Journal, Elsevier, vol. 22(2), pages 83-100.
    9. Sen Gupta, Abhijit & Sengupta, Rajeswari, 2014. "Capital Flows and Capital Account Management in Selected Asian Economies," MPRA Paper 80330, University Library of Munich, Germany, revised 01 Apr 2016.
    10. Heinz, Frigyes Ferdinand & Rusinova, Desislava, 2015. "An alternative view of exchange market pressure episodes in emerging Europe: an analysis using Extreme Value Theory (EVT)," Working Paper Series 1818, European Central Bank.
    11. repec:onb:oenbfi:y:2012:i:2:b:3 is not listed on IDEAS
    12. Jesús Crespo Cuaresma & Martin Feldkircher, 2012. "Drivers of Output Loss during the 2008–09 Crisis: A Focus on Emerging Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 46-64.

    More about this item

    Keywords

    Social and Behavioral Sciences; exchange market pressure; financial and trade factors; international reserves; global crisis;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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