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An alternative framework for foreign exchange risk management of sovereign debt

  • Melecky, Martin

This paper proposes a measure of synchronization in the movements of relevant domestic and foreign fundamentals for choosing suitable currency for denomination of foreign debt. The selection of explanatory variables for exchange rate volatility is motivated using a New Keynesian Policy model. The model predicts that not only traditional optimal currency area variables, but also variables considered by the literature on currency preferences, such as money velocity, should be relevant for explaining exchange rate volatility. The findings show that measures of inflation synchronization, money velocity synchronization, and interest rate synchronization can be useful indicators for decisions on the currency denomination of foreign debt.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4458.

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Date of creation: 01 Jan 2008
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Handle: RePEc:wbk:wbrwps:4458
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  1. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
  2. Charles Engel & Kenneth D. West, 2005. "Exchange Rates and Fundamentals," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 485-517, June.
  3. Fernando Broner & Guido Lorenzoni & Sergio L. Schmukler, 2003. "Why do emerging economies borrow short term?," Economics Working Papers 838, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2011.
  4. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications 4205, Inter-American Development Bank, Research Department.
  5. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  6. Geoffrey Kingston & Martin Melecky, 2005. "Currency preferences and the Australian dollar," International Finance 0502006, EconWPA.
  7. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-58, September.
  8. Brittain, Bruce, 1981. "International Currency Substitution and the Apparent Instability of Velocity in Some Western European Economies and in the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(2), pages 135-55, May.
  9. Ricardo Caballero & Kevin Cowan, 2006. "Financial Integration Without the Volatility," Working Papers Central Bank of Chile 387, Central Bank of Chile.
  10. Tsionas, Efthymios G., 2001. "P-STAR analysis in a converging economy: the case of Greece," Economic Modelling, Elsevier, vol. 18(1), pages 49-60, January.
  11. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  12. Philip Turner, 2002. "Bond markets in emerging economies: an overview of policy issues," BIS Papers chapters, in: Bank for International Settlements (ed.), The development of bond markets in emerging economies, volume 11, pages 1-12 Bank for International Settlements.
  13. Bayoumi, Tamim & Eichengreen, Barry, 1998. "Exchange rate volatility and intervention: implications of the theory of optimum currency areas," Journal of International Economics, Elsevier, vol. 45(2), pages 191-209, August.
  14. Henning Bohn, . "A Positive Theory of Foreign Currency Debt," Rodney L. White Center for Financial Research Working Papers 19-88, Wharton School Rodney L. White Center for Financial Research.
  15. Melecky, Martin, 2007. "Choosing the currency structure for sovereign debt : a review of current approaches," Policy Research Working Paper Series 4246, The World Bank.
  16. Sebastian Edwards & Roberto Rigobon, 2005. "Capital Controls, Exchange Rate Volatility and External Vulnerability," NBER Working Papers 11434, National Bureau of Economic Research, Inc.
  17. Michael B. Devereux & Philip R. Lane, 2002. "Understanding Bilateral Exchange Rate Volatility," Trinity Economics Papers 200211, Trinity College Dublin, Department of Economics.
  18. Alessandro Missale & Francesco Giavazzi, 2003. "Public Debt Management in Brazil," Development Working Papers 178, Centro Studi Luca d'Agliano, University of Milano.
  19. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
  20. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc.
  21. D. M. Nachane & R. Lakshmi, 2002. "Dynamics of inflation in India - a P-Star approach," Applied Economics, Taylor & Francis Journals, vol. 34(1), pages 101-110.
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