Exchange Rate Stabilization and IMF High Interest Rate Policy: A Critical Reconsideration Using a Dynamic Model

This paper examines whether the IMF high interest rate policy was suitable for crisis-ridden East Asian economies. Using an "overshoot" model similar to that of Dornbusch's (1976), it shows that this sort of policy might cause an unnecessary deflationary adjusting process and have no effect on containing the real depreciation of exchange rates in the long run. The study also demonstrates that Thai economic data coincides quite well with the model presented here. Finally, it points out that the high interest policy itself might provoke high risk-premium, the existence of which, in turn, justifies the policy. This means that the policy has a self-fulfilling property. In conclusion, a "one-size-fits-all" adaptation of high interest rate policy in a currency crisis is very dangerous in general, and was inappropriate for East Asia. The desirable policy would have been to let currencies depreciate and keep interest rates stable.

Monetary and Exchange Rate Policy in Malaysia before the Asian Crisis

This paper provides a case study to characterize the monetary policy regime in Malaysia, from a medium- and long-term perspective. Specifically, we ask how the central bank of Malaysia, Bank Negara Malaysia (BNM), has structured its monetary policy regime, and how it has conducted monetary and exchange rate policy under the regime. By conducting three empirical analyses, we characterize the monetary and exchange rate policy regime in Malaysia by three intermediate solutions on three vectors: the degree of autonomy in monetary policy, the degree of variability of the exchange rate, and the degree of capital mobility.

Monetary Systems in Developing Countries: An Unorthodox View

This paper analyzes some recent theoretical and practical evidence in terms of economic results of different exchange rate systems. It begins with a historical review and a summary of fixed versus flexible exchange rate systems. Then it compares the experiences of recent currency unions, mostly unilateral, and their relative economic performance during the past currency crises in Latin America, East Asia and Eastern Europe. A set of issues is discussed in order to weigh the overall costs and benefits for several economies. These issues include exchange rates, GDP performance, inflation rates and foreign reserves. The case of Argentina is also considered separately, comparing mostly seigniorage costs and interest-rate savings. The benefits and costs of the producers (central banks/governments) and the consumers (citizens) of money are discussed separately. Free banking is also considered in a fast-changing world where there will probably be fewer but better currencies. Not just the euro is a reality now, but maybe the "amero" and the "worldo" or the "mondo" very soon.

Financial Policies and Dynamic Game Simulation in Poland and Hungary

Recently, steady economic growth rates have been kept in Poland and Hungary. Money supplies are growing rather rapidly in these economies. In large, exchange rates have trends of depreciation. Then, exports and prices show the steady growth rates. It can be thought that per capita GDPs are in the same level and development stages are similar in these two countries. It is assumed that these two economies have the same export market and export goods are competing in it. If one country has an expansion of monetary policy, price increase and interest rate decrease. Then, exchange rate decrease. Exports and GDP will increase through this phenomenon. At the same time, this expanded monetary policy affects another country through the trade. This mutual relationship between two countries can be expressed by the Nash-equilibrium in the Game theory. In this paper, macro-econometric models of Polish and Hungarian economies are built and the Nash- equilibrium is introduced into them.

Market discipline by depositors : impact of deposit insurance on the Indonesian banking sector

This paper investigates market discipline by depositors in the Indonesian banking sector. Does depositor discipline fulfill its role in Indonesia? Does deposit insurance affect depositor behavior thereby imposing discipline on banks? These questions are empirically examined using panel data on Indonesian commercial banks from 1998 to 2009. In Indonesia deposit insurance was introduced in 2005. Depositor discipline is examined by two measures: change in the amount of deposits and interest rate. The empirical results show that depositors pay attention to bank soundness and riskiness and select banks based on the bank's condition with particular attention paid to equity ratio. It is found that depositors impose discipline on banks, but it varies according to regulatory and economic circumstances.

Financial Cooperation in East Asia

This paper addresses the rationale for financial cooperation in East Asia. It begins by giving a brief review of developments after the Asian currency crisis, and argues that enhancing regional financial cooperation both quantitatively and qualitatively will require: (1) upgrading surveillance capabilities in the region, and (2) creating a clear division of labor between regional institutions and the IMF. It also mentions the issue of membership and the background forces that have led to the duplication of similar forums in East Asia. Although the concern over crisis management is the central issue in East Asian financial cooperation, other issues such as exchange rate policy coordination and fostering regional capital markets are discussed as well.

Liability dollarization and fear of floating

This paper explores the idea that fear of floating can be justified as an optimal discretionary monetary policy in a dollarized emerging economy. Specifically, I consider a small open economy in which intermediate goods importers borrow in foreign currency and face a credit constraint. In this economy, exchange rate depreciation not only worsens importers' net-worth but also increases the financing amount in domestic currency, therefore exaggerating their borrowing finance premium. Besides, because of high exchange rate pass-through into import prices, fluctuations in the exchange rate also have strong impacts on domestic prices and production. These effects, together, magnify the macroeconomic consequences of the floating exchange rate policy in response to external shocks. The paper shows that the floating exchange rate regime is dominated by the fixed exchange rate regime in the role of cushioning shocks and in welfare terms.

Real exchange rate appreciation, resource boom, and policy reform in Myanmar

In the five-year period from 2006 to 2011, the real exchange rate of the Myanmar kyat appreciated 200 percent, signifying that the value of the US dollar in Myanmar diminished to one third of its previous level. While the resource boom is suspected as a source of the real exchange rate appreciation, its aggravation is related to administrative controls on foreign exchange and imports. First, foreign exchange controls prevented replacement of the negotiated transactions of foreign exchange with the bank intermediation. This hampered government interventions in the market. Second, import controls repressed imports, aggravating excess supply of foreign exchange. Relaxation of administrative controls is necessary for moderating currency appreciation.