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Thierry Bracke

1 July 2005
OCCASIONAL PAPER SERIES - No. 32
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Abstract
Financial crises in emerging market economies are often accompanied by difficulties of the sovereign to honour its contractual obligations. The official sector may reduce the likelihood of a disorderly outcome by extending financial assistance but there are limits to official sector involvement, not least because the potential volume of IMF lending is small compared to private capital flows and because a large "bail out" by the official sector would lead to moral hazard. For both these reasons - limited official funds and moral hazard - private sector creditors need to share some of the financial burden and thereby actively get involved in the management of financial crises in emerging market economies. The purpose of this report is to review the instruments that may promote such private creditor involvement as well as to provide a stock-taking of past experience and identify areas of possible improvement to the framework for crisis resolution.
JEL Code
F33 : International Economics→International Finance→International Monetary Arrangements and Institutions
F34 : International Economics→International Finance→International Lending and Debt Problems
13 June 2007
WORKING PAPER SERIES - No. 762
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Abstract
The paper examines over seventy episodes of current account adjustment in industrial and major emerging market economies. It argues that these episodes were characterised by strongly divergent economic developments. To reduce this divergence, the paper classifies episodes with similar characteristics in three groups, using cluster analysis. A majority of cases was characterised by internal adjustment through a slowdown of domestic demand and did not involve significant exchange rate movements. In some cases, the adjustment was mainly external, facilitated by a relatively modest exchange rate depreciation and without economic slowdown. Finally, some cases involved a crisis-like combination of a severe slowdown and a significant currency depreciation. Using a multinomial logit, we find that this classification of episodes helps improve the predictability of current account adjustment.
JEL Code
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
C14 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Semiparametric and Nonparametric Methods: General
C25 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Discrete Regression and Qualitative Choice Models, Discrete Regressors, Proportions
22 January 2008
OCCASIONAL PAPER SERIES - No. 78
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Abstract
In this paper, we take a systematic look at global imbalances. First, we provide a definition of the phenomenon, and relate global imbalances to widening external positions of systemically important economies that reflect distortions or entail risks for the global economy. Second, we provide an operational content to this definition by measuring trends in external imbalances over the past decade and putting these in a historical perspective. We argue that three main features set today's situation apart from past episodes of growing external imbalances: (i) the emergence of new players, in particular emerging market economies such as China and India, which are quickly catching up with the advanced economies; (ii) an unprecedented wave of financial globalisation, with more integrated global financial markets and increasing opportunities for international portfolio diversification, also characterised by considerable asymmetries in the level of market completeness across countries; and (iii) the favourable global macroeconomic and financial environment, with record high global growth rates in recent years, low financial market volatility and easy global financing conditions over a long time period of time, running at least until the summer of 2007. Finally, we provide an analytical overview of the fundamental causes and drivers of global imbalances. The central argument is that the increase in imbalances has been driven by a unique combination of structural and cyclical determinants.
JEL Code
F2 : International Economics→International Factor Movements and International Business
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F33 : International Economics→International Finance→International Monetary Arrangements and Institutions
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
30 June 2008
WORKING PAPER SERIES - No. 911
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Abstract
Since the late-1990s, the global economy is characterised by historically low risk premia and an unprecedented widening of external imbalances. This paper explores to what extent these two global trends can be understood as a reaction to three structural shocks in different regions of the global economy: (i) monetary shocks ("excess liquidity" hypothesis), (ii) preference shocks ("savings glut" hypothesis), and (iii) investment shocks ("investment drought" hypothesis). In order to uniquely identify these shocks in an integrated framework, we estimate structural VARs for the two main regions with widening imbalances, the United States and emerging Asia, using sign restrictions that are compatible with standard New Keynesian and Real Business Cycle models. Our results show that monetary shocks potentially explain the largest part of the variation in imbalances and financial market prices. We find that savings shocks and investment shocks explain less of the variation. Hence, a "liquidity glut" may have been a more important driver of real and financial imbalances in the US and emerging Asia than a "savings glut".
JEL Code
E2 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
G15 : Financial Economics→General Financial Markets→International Financial Markets
8 September 2008
OCCASIONAL PAPER SERIES - No. 95
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Abstract
This paper reviews financial stability challenges in the EU candidate countries Croatia, Turkey and the former Yugoslav Republic of Macedonia. It examines the financial sectors in these three economies, which, while at very different stages of development and embedded in quite diverse economic settings, are all in a process of rapid financial deepening. This manifests itself most clearly in the rapid pace of growth in credit to the private sector. This process of financial deepening is largely a natural and welcome catching-up phenomenon, but it has also increased the credit risks borne by the banking sectors in the three economies. These credit risks are compounded by the widespread use of foreign currency-denominated or -indexed loans, leaving unhedged bank customers exposed to potential swings in exchange rates or foreign interest rates. Moreover, these financial risks form part of a broader nexus of vulnerabilities in the economies concerned, in particular the external vulnerabilities arising from increasing private sector external indebtedness. That said, the paper also finds that the authorities in the three countries have taken several policy actions to reduce these financial and external vulnerabilities and to strengthen the resilience of the financial sectors.
JEL Code
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
Network
Eurosystem Monetary Transmission Network
30 September 2008
WORKING PAPER SERIES - No. 938
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Abstract
Global financial integration unlocks a huge potential for international risk sharing. We examine the degree to which international equity holdings act as a risk sharing device in industrial and emerging economies. We split equity returns into investment income (dividend distribution) and capital gains to investigate which of the two channels delivers the largest potential for risk sharing. Our evidence suggests that net capital gains are a more potent channel of risk sharing. They behave in a countercyclical way, that is they tend to be positive (negative) when the domestic economy is growing more slowly (rapidly) than the rest of the world. Countries with more countercyclical net capital gains experience improved consumption risk sharing. The empirical analysis furthermore suggests that these risk sharing properties of net capital gains have increased through time, in particular in the 1990s and early-2000s, on the back of a declining equity home bias and financial market deepening.
JEL Code
F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements
F30 : International Economics→International Finance→General
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
26 July 2010
OCCASIONAL PAPER SERIES - No. 115
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Abstract
This paper reviews financial stability challenges in the EU candidate countries: Croatia, the former Yugoslav Republic of Macedonia and Turkey. It follows a macro-prudential approach, emphasising systemic risks and the stability of financial systems as a whole. The paper recalls that the economies of all three countries experienced a recession in 2008-09 and shows how this slowed the rapid process of financial deepening that had been taking place since the beginning of the last decade. The deteriorating economic and financial conditions manifested themselves, first and foremost, through a marked deterioration in asset quality. These direct credit risks were compounded by the transformation of exchange and interest rate risks through a widespread use of foreign exchange-denominated or indexed loans and variable or adjustable interest rate loans. Moreover, funding and liquidity risks also materialised to some extent, although fully fledged bank runs were avoided, and none of the countries experienced a sharp reversal in external financing. Overall, the deterioration in asset quality has so far been managed well by the banking systems of the candidate countries, facilitated by large capital buffers, pro-active macro-prudential policies pursued by the authorities both before and during the crisis and the relative stability of exchange rates. Looking ahead, although uncertainties remain high regarding credit quality, the shock-absorbing capacities of the banking systems are fairly robust, as also evidenced by their relative resilience so far. Nevertheless, as the economic recovery sets in, the central banks should return to and possibly reinforce the implementation of measures to avoid a pro-cyclical build-up of credit asset) boom-bust cycles. Furthermore, given the relevance of foreign-owned banks in two of the three countries, a continued strengthening of home-host cooperation in the supervisory area will be crucial to avoid any kind of regulatory arbitrage.
JEL Code
E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
14 June 2011
WORKING PAPER SERIES - No. 1353
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Abstract
The paper provides a measure of exchange rate anchoring behaviour across 149 emerging market and developing economies for the 1980-2010 period. An extension of the Frankel and Wei (2008) methodology is used to determine whether exchange rates are pegged or floating, and in the case of pegs, to which anchor currencies they are pegged. To capture the role of major currencies over time, an aggregate trade-weighted indicator is constructed based on exchange rate regimes of individual countries. The evolution of this aggregate indicator suggests that the US dollar has continuously dominated exchange rate regimes, despite some temporary decoupling during major financial crises.
JEL Code
F30 : International Economics→International Finance→General
F31 : International Economics→International Finance→Foreign Exchange
F33 : International Economics→International Finance→International Monetary Arrangements and Institutions