David Folkerts-Landau

Risk Management of Sovereign Assets and Liabilities

In an environment of sizable and volatile capital flows and integrated international capital markets, large and unhedged net external sovereign liabilities expose countries to swings in international asset prices and to potential speculative currency attacks. The paper argues that an essential step in reducing emerging market vulnerability to such external shocks is to reform the institutional arrangements governing asset and liability management policies, so as to promote a transparent, publicly accountable, and professional incentive structure.

The Reform of Wholesale Payment Systems and its Impact on Financial Markets

This paper reviews the ongoing efforts to reduce the risks inherent in the world`s principal wholesale payment systems. The paper assesses the major policy proposals to contain the growth in intraday credit exposures that arises in net settlement wholesale payment systems and in the real-time gross systems in which the central bank provides daylight overdrafts. It also discusses the benefits of these risk-management policies, and we assess the adverse impact of applying interest charges for intraday central-bank credit or of collateralizing such credit on liquidity in financial markets.

Determining the Value of a Financial Unit of Account Based on Composite Currencies: The Case of the Private ECU

The paper presents evidence from the past three years which indicates that the exchange rate between the private ECU and the official ECU Basket can deviate substantially from par. The value of the private ECU is driven by expectations that a future European Central Bank will enforce par convertibility between the private ECU and the official ECU basket of currencies. Meanwhile, no existing institutional arrangement limits the private ECUs value in terms of the Basket. This paper addresses the question of what determines the values of the private ECU and of private ECU interest rates. We show that an anticipation of a future fixing of the private ECUs value, together with the interest rate setting mechanism of the large-value ECU payment and clearing system, are sufficient to determine its value. The determination of the private ECU exchange rate provides the template for how to determine the value of any private composite currency, such as, for example, a private SDR.

Financial Crises: What Have We Learned From Theory and Experience?

Michael Mussa opened the panel by recalling the occasion of the first seminar he had given as a graduate student at the University of Chicago, which was scheduled for Monday August 19, 1969. The topic was devaluation, and as events would have it, President Pompidou devalued the French franc the preceding Sunday. The Brazilian authorities, by floating the real on January 15, the day before the present panel discussion, had provided similar background for this occasion.