Taimur Baig

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. Cross-country correlations among currencies and sovereign spreads are found to increase significantly during the crisis period, whereas the equity market correlations offer mixed evidence. A set of dummy variables using daily news is constructed to capture the impact of own-country and cross-border news on the markets. After controlling for own-country news and other fundamentals, the paper shows 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.

Domestic Petroleum Product Prices and Subsidies: Recent Developments and Reform Strategies

The paper reviews recent developments in the pass-through of international to domestic petroleum product prices, in the different fuel pricing regimes, and in fuel subsidies in a range of emerging market and developing economies. The main finding of the paper is the limited price pass-through in many countries and the consequent increase in fuel subsidies. The paper proposes that key elements of a successful strategy to contain subsidies should comprise: making subsidies explicit; making pricing mechanisms more robust; combining reductions in subsidies with measures to protect the poorest; using the resulting savings well, and transparency and consultation.

Characterizing Exchange Rate Regimes in Post-Crisis East Asia

This paper examines the behavior of the exchange rates of selected emerging market East Asian economies in the aftermath of the Asian crisis. The results suggest that movements in the Asia-5 currencies (Indonesia, Korea, Malaysia, Philippines, and Thailand) were significantly influenced by the U.S. dollars day-to-day movements before the crisis, and have indeed continued to do so post-crisis. However, comparisons with a range of other currencies suggest that this is a fairly common trait across various regimes. Moreover, results from the post-crisis data do not support the view that the Asia-5 currencies presently have the same characteristics as they did before the crisis.

Underlying Factors Driving Fiscal Effort in Emerging Market Economies

Using a panel dataset of 34 emerging market countries for the period 1990-2002, we examine the roles of various economic, political, and institutional variables in determining fiscal effort, as proxied by the primary surplus. We find that while fiscal effort increases, as expected, with the level of lagged debt, this effect tapers off beyond a certain threshold. We also find an inverse U-shaped relationship between the primary balance and revenue. Fiscal effort rises with positive shocks to oil prices (for oil exporters), when the economy grows above its potential, and in the presence of an IMF-supported program. In contrast, high democratic accountability and strong and impartial bureaucracies help lower market risk and hence lower the relative need for fiscal adjustment. Finally, fiscal effort tends to decline when too many constraints are faced by the executive.

Understanding the Costs of Deflation in the Japanese Context

This paper examines the cost of deflation in the context of Japans ongoing deflationary episode. The impact of deflation owing to the zero interest rate bound on monetary policy, wage rigidity, redistribution of wealth from debtor to creditor, and inflexibilities in the financial sector are examined. It is seen that the generalized decline in the Japanese price level, however gradual or mild, has substantially exacerbated the economys adjustment process under already difficult economic conditions.