Ilan Goldfajn

Financial Market Contagion in the Asian Crisis

This paper tests for evidence of contagion between the financial markets of Thailand, Malaysia, Indonesia, Korea, and the Philippines. We find that correlations in currency and sovereign spreads increase significantly during the crisis period, whereas the equity market correlations offer mixed evidence. We construct a set of dummy variables using daily news to capture the impact of own-country and cross-border news on the markets. We show that after controlling for own-country news and other fundamentals, there is evidence of cross-border contagion in the currency and equity markets.

The Russian Default and the Contagion to Brazil

In the aftermath of the Russian crisis in August 1998, a series of events led to the Brazilian crisis that culminated in the floating of the real in January 1999. The timing of the events led academics and policy makers to suspect that there was contagion from the Russian crisis to Brazil. If true, the transmission of pressure from Russia to Brazil would be a special case among the financial crises episodes seen in the 1990s. In contrast to the Mexican (1994) and Thai (1997) crises, the Russian contagion to Brazil appears to have crossed regional borders, thus leading to a number of interesting questions. Given the lack of substantial trade and direct financial linkages, why did the Russian devaluation prompt capital flight from Brazil? Why did some countries with similar fundamentals and stronger economic links not have a crisis (as for example Hungary)? In this paper, we attempt to verify the contagion presumption, and to analyze related issues that can aid our understanding of financial crises and contagion.

Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis

This paper provides evidence on the relationship between monetary policy and the exchange rate in the aftermath of currency crises. It analyzes a large dataset of currency crises in 80 countries for the period 1980-98. The main question addressed is whether monetary policy can increase the probability of reversing a postcrisis undervaluation through nominal appreciation rather than higher inflation. We find that tight monetary policy facilitates the reversal of currency undervaluation through nominal appreciation. When the economy also faces a banking crisis, the results are not robust and depend on the specification.

Should Government Smooth Exchange Rate Risk

A general equilibrium model is built to explain if there are circumstances in which exchange rate risk smoothing (ERRS) policies may bring a Pareto-improvement for an indebted small open (home) economy. The model shows that this is the case when overpessimistic foreign creditors demand a large spread on the default risk-free world interest rate, whose size can be reduced by ERRS policies and, in addition, market imperfections, such as information asymmetry between foreign investors and domestic debtors, prevent home economys residents from internalizing all benefits and costs of the exchange rate risk reallocation into their allocative decisions.