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Risk and Asian exchange rate regimes

  • Goyal, Ashima
  • Agarwal, Ankita

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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File URL: http://mpra.ub.uni-muenchen.de/24309/1/MPRA_paper_24309.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24309.

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Date of creation: Sep 2005
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Publication status: Published in Global Economic Review 3.34(2005): pp. 321-329
Handle: RePEc:pra:mprapa:24309
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  1. Chang, R. & Velasco, A., 1999. "Liquidity Crises in Emerging Markets: Theory and Policy," Working Papers 99-14, C.V. Starr Center for Applied Economics, New York University.
  2. 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.
  3. Goyal Ashima, 2005. "Asian Reserves and the Dollar: Is Gradual Adjustment Possible?," Global Economy Journal, De Gruyter, vol. 5(3), pages 1-26, September.
  4. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers.
  5. 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.
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