Virginie Coudert

Leading Indicators of Currency Crises in Emerging Economies

This study identifies common features of currency crises in 15 emerging countries over the period 1980-1998. By analyzing such features, we build an early-warning system aimed at predicting looming crises in probabilistic terms.

Real equilibrium exchange rate in China is the renminbi undervalued

The aim of the paper is to give some insights about the possible undervaluation of the Chinese currency. Firstly, we review the “usual suspects” for undervaluation by looking at different economic indicators. Secondly, we address the issue of the “Balassa effect”, by comparing China with other emerging countries. We try to measure the gap between the evolution of the real exchange rate in China and what would have resulted from a “normal” Balassa effect. We use two methods to assess this gap: cross-section estimations and panel cointegration. We evidence a lack of Balassa effect in China, consistent with the fact that the real exchange rate did not appreciate despite the rapid catching up. Thirdly, we use a FEER (Fundamental Equilibrium Exchange Rate) approach in order to get another idea of the existence and the size of the Renminbi’s misalignment. We use the NIGEM model for representing the foreign trade of China, the United States, Euro area, South Korea and Japan. We calculate the real effective exchange rate that is consistent with sustainable current accounts. Our results show that Chinas real exchange rate was highly undervalued in 2002 and 2003 in effective terms and even more against the US dollar. Using the model with different assumptions, we analyse how the magnitude of currencies misalignments are modified with a lower deficit target for China. As expected, the Renminbi’s misalignment is less pronounced. Moreover, if we have taken into account the disguised unemployment, undervaluation would have been still weaker. Another interesting result is that the dollar’s misalignment is only weakly affected by the Renminbi’s misalignment. This suggests that a revaluation of the Renminbi would only have a small effect on the US external deficit.

Leading indicators of currency crises for emerging countries

Abstract This study identifies common features of currency crises in 15 emerging countries using quarterly data over the period 1980–1998. We use Fishers linear discriminant analysis in order to build an early-warning system. Capital control and contagion dummies, as well as an indicator for problems in the banking sector, are included in the set of explanatory variables; the overvaluation of currencies is assessed by real effective exchange rates. We propose a ‘balancing’ approach to deal with the trade-off between good classifications and false alarms. The model yields a relatively good—and unbiased—ratio of correct predictions: four out of five crises are correctly predicted and only one out of five non-crises is predicted as a crisis.

Currency Misalignments and Exchange Rate Regimes in Emerging and Developing Countries

Pegged exchange rates are often pointed out as more prone to risk of overvaluation, because their real exchange rates have a tendency to appreciate. We check this assumption empirically over a large sample of emerging and developing countries, by using two databases for de facto classifications by Levy-Yeyati and Sturzenegger (2003) and by Reinhart and Rogoff (2004). We assess currency misalignments by estimating real equilibrium exchange rates taking into account a Balassa effect and the impact of net foreign assets. Pegged currencies are shown to be more overvalued than floating ones.

On Currency Misalignments within the Euro Area

Although nominal parities have been completely fixed within the euro area since the launch of the single currency, real effective exchange rates have continued to vary under the effect of inflation disparities, exhibiting a strong appreciation in the peripheral countries. In this paper, we assess real exchange rate misalignments for euro area countries by using a Behavioral Equilibrium Exchange Rate (BEER) approach on the period 1980-2010. The results show that the peripheral member countries have been suffering from increasingly overvalued exchange rates since the mid-2000s, as their real appreciation has not stemmed from improving fundamentals in terms of productivity or external position. In addition, currency misalignments have been increased on average for all euro area countries since monetary union, while becoming more persistent. More worryingly, our findings highlight different patterns across members, as misalignments have been larger and more persistent in peripheral countries than in core countries. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item (This abstract was borrowed from another version of this item.)

Does Euro or Dollar Pegging Impact the Real Exchange Rate? The Case of Oil and Commodity Currencies

The aim of this paper is to investigate the equilibrium exchange rates for commodity and oil currencies as well as the discrepancies of their observed exchange rates to these equilibriums. To this end, first, we estimate a long‐term relationship between the real effective exchange rate and economic fundamentals, including the commodity terms of trade. The estimation relies on panel cointegration techniques and covers annual data from 1980 to 2007. Our results show that real exchange rates co‐move with commodity prices in the long run and respond to oil price somewhat less than to commodity prices. Second, we assess the degree of misalignment of these currencies, as the gap between their observed exchange rate and the estimated equilibrium exchange rate. We show that these misalignments are not significantly related to the exchange rate regimes adopted by the countries, either pegged or floating. However, for pegged currencies, the size of misalignments significantly depends on the anchor currency, either the euro or the dollar. A comparison of misalignments of pegged commodity and oil currencies across different periods confirms these results: during periods of dollar (euro) overvaluation, currencies pegged to the dollar (euro) tend to be overvalued; the reverse being true when the dollar (euro) is undervalued. Consequently, pegged currencies are often driven away from their equilibria by wild fluctuations in the key currencies, on which they are anchored.

The Credit Default Swap Market and the Settlement of Large Defaults

The huge positions on the credit default swaps (CDS) have raised concerns about the ability of the market to settle major entities’ defaults. The near-failure of AIG and the bankruptcy of Lehman Brothers in 2008 have revealed the exposure of CDS’s buyers to counterparty risk and hence highlighted the necessity of organizing the market, which triggered a large reform process. First we analyse the vulnerabilities of the market at the bursting of this crisis. Second, we unravel the auction process implemented to settle defaults, the strategies of buyers and sellers and the links with the bond market. We then study the way it worked for key defaults, such as Lehman Brothers, Washington Mutual, CIT and Thomson, as well as for the Government Sponsored Enterprises, which reveals some oddities in the final prices. Third, we discuss the ongoing reforms aimed at strengthening the market resilience.

The Interactions Between the Credit Default Swap and the Bond Markets in Financial Turmoil

We analyse the links between credit default swap (CDS) and bond spreads and try to determine which one is the leading market in the price discovery process. To do that, we construct a sample of CDS premia and bonds spreads on a generic 5-year bond, for 17 financials and 18 sovereigns. First, we run VECM estimations, showing that the CDS market has a lead over the bond market over the whole sample. A decomposition of the sample shows that this result holds for financials as well as for the high-yield emerging sovereigns. However, the bond market still drives the CDS market for the sovereigns in the core of the euro area. Second, we check for non-linearities in the adjustment process during the current crisis. Results show that the CDS markets lead has been amplified by the crisis for financial institutions.

Pegging emerging currencies in the face of dollar swings

The aim of this article is to study ruptures of exchange rate pegs by focusing on the fluctuations of the anchor currency. We test for the hypothesis that currencies linked to the USD are more likely to loosen their peg when the USD is appreciating, while sticking to it otherwise. To this end, we estimate smooth-transition regression models for a sample of 28 emerging currencies over the 1994–2011 period. Our findings show that while the real effective exchange rates of most of these countries tend to co-move with that of the USD in times of depreciation, this relationship is frequently reversed when the US currency appreciates over a certain threshold.

Two-Way Interplays between Capital Buffers, Credit and Output: Evidence from French Banks

We assess the extent to which capital buffers (the capital banks hold in excess of the regulatory minimum) exacerbate rather than reduce the cyclical behavior of credit. We empirically study the relationships between output gap, capital buffers and loan growth with firm-level data for French banks over the period 1993—2009. Our findings reveal that bank capital buffers intensify the cyclical credit fluctuations arising from the output gap developments, all the more as better quality capital is considered. Moreover, by performing Granger causality tests at the bank level, we find evidence of a two-way causality between capital buffers and loan growth, pointing to mutually reinforcing mechanisms. Overall, those empirical results lend support to a countercyclical financial regulation that focuses on highest-quality capital and aims at smoothing loan growth.