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Output Costs of Currency and Balance of Payments Crises in Emerging Markets. By: Hutchison, and Noy Presented By: John N. Denker. Overview. Investigated balance of payments and currency crises in 24 emerging market economies Panel Data between 1975 – 1997

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output costs of currency and balance of payments crises in emerging markets

Output Costs of Currency and Balance of Payments Crises in Emerging Markets

By: Hutchison, and Noy

Presented By: John N. Denker

overview
Overview
  • Investigated balance of payments and currency crises in 24 emerging market economies
  • Panel Data between 1975 – 1997
  • BoP and Currency Crises are found to have dropped output by 5 – 8% over a two – three year period
  • Output recovers after three years post crisis
introduction
Introduction
  • Frequency: 51 crisis episodes over the past 25 years, 8% of the time an emerging market was facing serious turbulence in currency markets
opposing views on the likely output effect of a bop and currency crises
Opposing Views on the likely output effect of a BoP and Currency Crises
  • 1. Traditional
    • With wage and price rigidities, a sharp nominal devaluation would produce a real depreciation in the short run, increase exports and stimulate employment and output
opposing views on the likely output effect of a bop and currency crises1
Opposing Views on the likely output effect of a BoP and Currency Crises
  • 2. Alternate
    • A sharp devaluation would lead to limited importing of capital goods, through such channels as a wealth effect on aggregate demand, higher production costs, disruption in credit markets,or a sudden cessation in capital inflows
estimating the effects of currency and bop crises on real output growth
Estimating the Effects of Currency and BoP Crises on Real Output Growth
  • Equation to estimate these effects are of the evolution of output in emerging markets
  • Determinants of output in this model are a set of domestic policy and external factors as well as country-specific fixed effects and lagged output growth
  • All variables, except openness have a one year lag to capture delayed response of output Macroeconomic developments
domestic policy
Domestic Policy
  • Factors of Domestic Policy
    • Changes in Governmental Budgets
    • Credit Growth
external factors
External Factors
  • Factors include
    • Growth in Foreign output
    • Real Exchange rate overvaluation
data description
Data Description
  • Defining Currency and BoP Crises
    • Constructed from large values in an index of currency pressure
    • Presumes that any nominal currency changes or reserve changes associated with exchange rate pressure should affect the PPP of the Domestic Currency
data description1
Data Description
  • Control Variables in the Output Growth Equation
    • External Exogenous Factors
      • Lagged external growth rates
      • Openness to foreign trade
      • Lagged rate of real exchange rate overvaluation
empirical results
Empirical Results
  • Macro Developments: Before/After Statistics
    • .5% decline in GDP Growth in crisis year
    • Declines are not significant
    • Output goes back to previous level after two years
    • Inflation and Credit Growth are on a rising trend both before and after the crisis
    • Budget deficits rise modestly post crisis
benchmark model estimates
Benchmark Model Estimates
  • Model explains 35% of the variation in output growth
  • Emerging Markets that are more open grow faster
  • Emerging Markets are more adversely effected by turbulence in currency markets
conclusion
Conclusion
  • Research supports the view that currency crises in emerging markets are typically associated with substantial slowdown in economic growth
  • Major Crises do not appear to contract output to a larger extent than smaller crises
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