Archive for June 6th, 2010

Blogging break…again

June 6, 2010

The blog is on a short break again… I might post a few things but not sure……To resume fully on Wednesday, 9 June 2010…..Apologies for the bother….

Meanwhile I came across this interesting paper on capital controls. It says they don’t work  and their presence actually increases the sensitivity of currency crises.

In all cases that we investigate, maintaining real GDP growth and preventing real overvaluation of the currency appear to be critical factors preventing currency crises. Moreover, the presence of capital controls greatly increases the sensitivity of currency crises to changes in real GDP growth and real exchange rate overvaluation. In this way, capital controls appear to indirectly make the economy much more vulnerable to macroeconomic fluctuations. By contrast, the presence of capital controls does not have much effect on the sensitivity of currency crises to changes in real GDP growth and real exchange rate overvaluation.

Our results may help to understand why most emerging markets fared relatively well during the recent global financial crisis that emanated from the United States. First, there was no rush to impose capital controls prior to or during this period of financial turbulence. This meant that no obvious signals of weakness were evident that might have spawned speculative pressures.

Second, the apparent decoupling of many emerging markets, particularly in Asia, from developments in the U.S. and other industrial countries may be attributable to their relatively strong output growth and greater exchange rate flexibility that prevented sustained overvaluation in currency values prior to the crisis. This degree of exchange rate flexibility, for example, was not evident prior the 1997-98 Asian crisis. The buildup of international reserves by many emerging markets also limited their vulnerability to the financial shock. It was only after the failure of Lehman Brothers in September 2008 that the crisis intensified dramatically, generating a ―common‖ financial shock to all emerging markets, with capital flows shifting away from countries that were viewed as more vulnerable. This largely distinguishes this crisis—with a common shock emanating from advanced economies, especially the U.S — from most previous episodes.

Hmmm.pretty interesting findings…Contrary to what this paper from IMF said.

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