Christian B. Mulder

External Vulnerability in Emerging Market Economies; How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion

This paper investigates the factors behind the 1994 and 1997 crises and whether these can explain the 1998 crisis. The study reveals that: (i) variables used in an Early Warning System model developed by IMF staff scored well in predicting the 1998 crisis out-of-sample; (ii) all three crisis episodes can be well explained by a parsimonious set of core fundamentals and liquidity related variables; and (iii) the presence of an IMF-supported program significantly reduced the depth of crises.

The Role of Corporate, Legal and Macroeconomic Balance Sheet Indicators in Crisis Detection and Prevention

This study tests the recent balance sheet explanations of external crises in emerging market countries and the role of standards in these crises. Using several unique data sets, it finds that corporate sector balance sheets have a very significant impact on both the likelihood and depth of external crises. The indicators supplement, rather than substitute for traditional macroeconomic variables with standards playing potentially an important role. The results have implications for strategies to limit external vulnerability: they suggest that policymakers need to promote sound private sector financial structures, support sound shareholder rights, in addition to employing prudent macroeconomic policies to reduce exposure to crises. In sample predictions point to potentially large improvements in the predictive power of models that include these indicators.

Political instability and economic vulnerability

This paper analyzes and tests the influence of political instability on economic vulnerability in the context of the 1994 and 1997 crisis episodes. It constructs four political variables that aim at quantifying political instability. The paper finds that, for countries with weak economic fundamentals and low reserves, political instability has a strong impact on economic vulnerability. The estimation results suggest that including political variables in economic models does improve their power to explain and predict economic crises. The paper concludes that countries are more economically vulnerable during, and especially following, election periods, and when election results are less stable than at other times. Copyright @ 2000 by John Wiley & Sons, Ltd. All rights reserved.

Foreign Currency Credit Ratings for Emerging Market Economies

This paper examines how ratings for emerging market economies have been set. Given the high degree of autocorrelation in ratings, we use estimators that yield consistent parameters in the presence of such correlation. The results show that rating changes for emerging market economies have been dominated by variables different from those suggested by the literature. We also conclude that some deterioration in the ratings was warranted during the recent crisis episodes in view of the behavior of economic fundamentals, but that the agencies overreacted for several key countries. We find evidence of a structural break: since the Asian crisis period, ratings have been influenced by reserves in relation to short-term debt.

The Link Between Adherence to International Standards of Good Practice, Foreign Exchange Spreads, and Ratings

This paper examines the relationship between adherence to international standards of good practice in policy-making and two key indicators of access to capital markets and the cost of this access: spreads and sovereign ratings. In contrast to other work, this study reviews a broad set of indicators for adherence to international standards. The estimations are conducted for emerging market economies, and pay particular attention to issues of persistence in spreads and ratings and nonlinearities in the relationships. The main finding confirms the expectation that standards are indeed relevant. Accounting standards and property rights are especially important for spreads, in addition to data transparency (SDDS subscription). Accounting standards and corruption are especially important in explaining ratings in addition to trade protectiveness (not a standard).

Addressing Information Gaps

The global financial crisis has identified serious gaps in information. This paper outlines some of the key information gaps and the priorities for filling them. Key areas for attention include the granularity of disclosures on exposures by large and complex financial institutions; disclosures and assessments of complex structured products; revamping of indicators used in financial stability analysis to focus on indicators with greater early warning content; and improving transparency in over-the-counter derivatives markets.

Survey of Reserve Managers : Lessons from the Crisis

This paper reports in detail on a survey that was circulated to reserve managing central banks of IMF member countries in April 2012. The survey aims to gain further insight into how reserve managers have reacted to the crisis to date. The survey also aims to understand how reserve managers arrive at their strategic asset allocation and how they operate their risk management frameworks in practice. Some of the key themes that emerge from the survey include potential procyclical and counter cyclical behavior by reserve managers, increased focus placed on returns and wide variability across countries in how the currency composition of reserves is derived.

The Macroeconomic Effects of Counterpart Funds and the Underlying Foreign Aid

Counterpart funds generated through foreign currency or commodity aid have again become an issue of interest, in view of the substantial buildup of these funds. Contrary to the usual approach a model is developed in this paper, which takes account of the budgetary impact, supply-side and money demand effects of counterpart funds and the underlying foreign aid. This model is used to show that counterpart funds need not have any economic impact if their creation, use, and effects are adequately monitored and understood, both by donors and by the authorities in the recipient country. The policy rules that ensure an inflation- and foreign reserves-neutral result from expected and unexpected foreign aid are derived and contrasted with a policy rule regarding unexpected foreign aid that is sometimes observed in IMF programs. A feasible alternative is developed. Various real world complications are shown not to alter the conclusions.