Michael M. Hutchison

Currency Crises, Capital Account Liberalization, and Selection Bias

Are countries with unregulated capital flows more vulnerable to currency crises? Efforts to answer this question properly must control for “self selection” bias since countries with liberalized capital accounts may also have more sound economic policies and institutions that make them less likely to experience crises. We employ a matching and propensity score methodology to address this issue in a panel analysis of developing countries. Our results suggest that, after controlling for sample selection bias, countries with liberalized capital accounts experience a lower likelihood of currency crises. That is, when two countries have the same likelihood of allowing free movement of capital (based on historical evidence and a very similar set of economic and political characteristics)—and one country imposes controls and the other does not-- the country without controls has a lower likelihood of experiencing a currency crisis. This result is at odds with the conventional wisdom and suggests that the benefits of capital market liberalization for external stability are substantial.

Is Intervention a Signal of Future Monetary Policy? Evidence from the Federal Funds Futures Market

Sterilized foreign exchange market intervention may affect the exchange rate if it signals future monetary policy actions. Signaling will be effective if the central bank backs up intervention with predictable changes in the stance of monetary policy and, in turn, affects current expectations. The authors investigate whether intervention operations in the United States are related to changes in expectations over the stance of future monetary policy. Expected changes in policy are inferred from changes in second- and third-nearby Federal funds futures rates. They also test the signaling hypothesis using survey-based measures of expected short-term interest rate changes. Estimates obtained from a GARCH time-series model over the 1989-93 period do not support the signaling hypothesis: dollar-support intervention is not related to a rise in expected future short-term interest rates (monetary tightening). However, intervention significantly increases the conditional variance of Federal funds future rates, suggesting that it adds considerable noise to the market.

U.S.-Japanese bilateral trade and the yen-dollar exchange rate: an empirical analysis

The United States has recently experienced unprecedented balance of trade deficits. The merchandise trade deficit reached an all-time high of over

Financial liberalization in the Pacific Basin: Implications for real interest rate linkages☆

61 billion in 1983, and for 1984 was

Sudden Stops and the Mexican Wave: Currency Crises, Capital Flow Reversals and Output Loss in Emerging Markets

108 billion. Japan is often singled out as the major contributor to this deficit. In 1984, roughly one-third of the U.S. merchandise trade deficit and over one-half of the U.S. manufacturing trade deficit was with Japan. Moreover, since shifts in trade balances are widely regarded as a function of changes in exchange rates, there has been a tendency to focus on the general depreciation of the yen in terms of the dollar which began in 1978 in explaining the U.S. trade deficit. This paper explores empirically the response of the U.S.-Japanese trade balance in manufacturing to movements in the yen-dollar rate. The analysis, based on both structural and reduced form approaches, provides a test of the conventional view that the weak yen has been a major factor explaining the Japanese penetration into the U.S. manufacturing sector, while Japanese protectionism has effectively insulated Japans markets from U.S. competition. Our analysis does not support this view. We find U.S. imports from Japan essentially insensitive to exchange rate movements, but U.S. exports to Japan highly exchange rate elastic. Since U.S. manufacturing imports from Japan dominate corresponding exports (

ECB Foreign Exchange Intervention and the EURO: Institutional Framework, News and Intervention

58 billion to

Capital Controls and Exchange Rate Instability in Developing Economies

8 billion in 1984), we conclude that even a sustained appreciation of the yen in terms of the dollar is unlikely to reduce significantly the U.S. manufacturing trade deficit. In section II of this paper we specify structural and reduced-form models explaining U.S. bilateral manufacturing trade with Japan. In section III we present and evaluate struc-

Empirical evidence on the insulation properties of fixed and flexible exchange rates: The Japanese experience

Abstract Empirical estimates are obtained that indicate the degree of linkage between domestic real interest rates in Pacific Basin countries and those in the United States has increased as financial liberalization in the region has proceeded. J. Japan. Int. Econ. , March 1990, 4 (1), pp. 36–48. Federal Reserve Bank of San Francisco, San Francisco, California 94120-7702; University of California, Santa Cruz, California 95060.

Exports, Non-Exports and Externalities: A Granger Causality Approach

Abstract Sudden stops are the simultaneous occurrence of a currency/balance of payments crisis with a reversal in capital flows. We investigate whether sudden-stop crises are a unique phenomenon and whether they entail an especially large and abrupt pattern of output collapse (a “Mexican wave”). Using a panel data set over 1975–1997 and covering 24 emerging-market economies, we distinguish between the output effects of currency crises, capital inflow reversals, and sudden-stop crises. Sudden-stop crises have a large negative, but short-lived, impact on output growth over and above that found with currency crises. A currency crisis typically reduces output by about 2–3%, while a sudden stop reduces output by an additional 6–8% in the year of the crisis. The cumulative output loss of a sudden stop is even larger, around 13–15% over a 3-year period. Our model estimates correspond closely to the output dynamics of the ‘Mexican wave’ (such as seen in Mexico in 1995, Turkey in 1994 and elsewhere), and out-of-sample predictions of the model explain well the sudden (and seemingly unexpected) collapse in output associated with the 1997–1998 Asian Crisis.

The Transmission of Federal Reserve Tapering News to Emerging Financial Markets

Using a unique intervention “news” data set, this paper investigates the impact of ECB intervention and intervention-related news (newswire reports) on the Euro exchange rate. A time-series study of news generated by ECB officials and market participants regarding intervention and the value of the Euro as well as an event study of firm reports of ECB intervention is conducted. Both studies find significant short-run effects on the Euro value, while only “negative” statements (official statements denying past intervention or ruling out future intervention) appear to have persistent effects.