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An alternative framework for foreign exchange risk management of sovereign debt

Listed author(s):
  • 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
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. Devereux, Michael B. & Lane, Philip R., 2003. "Understanding bilateral exchange rate volatility," Journal of International Economics, Elsevier, vol. 60(1), pages 109-132, May.
  3. 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.
  4. 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.
  5. 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.
  6. Fernando A. Broner & Guido Lorenzoni & Sergio L. Schmukler, 2013. "Why Do Emerging Economies Borrow Short Term?," Journal of the European Economic Association, European Economic Association, vol. 11, pages 67-100, 01.
  7. Sebastian Edwards & Roberto Rigobon, 2005. "Capital Controls, Exchange Rate Volatility and External Vulnerability," NBER Working Papers 11434, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-1230, December.
  11. Alessandro Missale & Francesco Giavazzi, 2003. "Public Debt Management in Brazil," Development Working Papers 178, Centro Studi Luca d'Agliano, University of Milano.
  12. Ricardo Caballero & Kevin Cowan, 2006. "Financial Integration Without the Volatility," Working Papers Central Bank of Chile 387, Central Bank of Chile.
  13. Bohn, Henning, 1990. "A positive theory of foreign currency debt," Journal of International Economics, Elsevier, vol. 29(3-4), pages 273-292, November.
  14. 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.
  15. Kingston, Geoffrey & Melecky, Martin, 2007. "Currency preferences and the Australian dollar," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 454-467, April.
  16. 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 135-155, May.
  17. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  18. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
  19. 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 841-858, September.
  20. Melecky, Martin, 2007. "Choosing the currency structure for sovereign debt : a review of current approaches," Policy Research Working Paper Series 4246, The World Bank.
  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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