L21: CRISES IN EMERGING MARKETS : WTP chapter sections: 24.1 INFLOWS TO EMERGING MARKETS -- Reserves (continued from Lecture 3) 24.2 MANAGING OUTFLOWS

L21: CRISES IN EMERGING MARKETS: WTP chapter sections:

24.1 INFLOWS TO EMERGING MARKETS -- Reserves (continued from Lecture 3)

24.2 MANAGING OUTFLOWS -- Early Warning Indicators

24.3 SPECULATIVE ATTACKS (Lecture 20)

24.4 CONTAGION

24.5 IMF COUNTRY PROGRAMS

24.6 CONTRACTIONARY EFFECTS OF DEVALUATION (continued

from Lect.12)

24.7 THE CAR CRASH ANALOGY

Breaching the central bank’s defenses.

3 cycles of capital flows to emerging markets:

1975-81 -- Recycling of petrodollars, via bank loans, to oil-importing LDCs

1982 -- Mexico unable to service its debt on schedule => Start of international debt crisis.

1982-89 -- The “lost decade” in Latin America

1990-96 -- New record capital flows to emerging markets globally

1994, Dec. -- Mexican peso crisis

1997, July -- Thailand forced to devalue and seek IMF assistance => beginning of East Asia crisis (Indonesia, Malaysia, Korea...)

1998, Aug. -- Russia devalues & defaults on much of its debt. => Contagion to Brazil.

2001, Feb. --Turkey abandons exchange rate target2002, Jan. -- Argentina abandons 10-yr “convertibility plan” & defaults

2003-07 -- New capital flows into developing countries, incl. China, India...

2008-12-- Global Fin. Crisis: Iceland, Latvia, Ukraine, Pakistan, Greece, Ireland, Portugal…

1.

2.

3.

Managing Capital InflowsRecall alternative ways to manage capital inflows:

A. Allow money to flow inB. Sterilized interventionC. Allow currency to appreciateD. Reimpose capital controls

In the boom phase of 1990-1996,

• countries pursued exchange rate targets.

• Some experimented with re-imposing controls on capital inflows (Chile & Colombia), but mostly they allowed capital to flow in.

• They used part of the inflow to add to foreign exchange reserves, but – as in the earlier cycle 1975-1981 – they also used much of it to finance trade deficits, some as large as the capital inflows. (Calvo, Leiderman, & Reinhart, 1996).

Managing capital inflows, cont.

In the boom phase of 2003-2007:

• Many countries had more flexible exchange rates than before.

• Many reduced the share of capital inflow denominated in forexexcept in Central & Eastern Europe

• Few imposed new controls on the inflows [until Nov. 2009].

• This time, a majority of emerging market countries ran current account surpluses rather than deficits.

• Thus inflows went into reserve accumulation (in fact, more than 100%).

• As a result, reserves reached unprecedented levels.

2003-07: This time, many countries used the inflowsto build up forex reserves,

rather than to finance Current Account deficits

Net Capital Flow

Change in Reserves

Current Account Balance

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

% o

f G

DP

in % of GDP(low- and

middle-income countries)

2003-07boom1991-97 boom

IMF Survey Magazine Oct.8, 2009 “Did Foreign Reserves Help Weather the Crisis?”

by O. Blanchard, H.Faruqee, & V.Klyuev http://www.imf.org/external/pubs/ft/survey/so/2009/num100809a.htm

As a result, reserves reached extreme levels....

…, especially

in Asia.

Rodrik (2006)

Traditional denominator for reserves: imports

New denominator to gauge reserves: short-term debt.

Rodrik (2006)

s.t. debt / R

> 1

<1

After 2000, many brought their reservesabove the level of short-term debt –

the “Guidotti rule.”

Alternative Ways of Managing Capital Outflows

A. Allow money to flow out (but can cause recession, or even banking failures)

B. Sterilized intervention (but can be difficult, & only prolongs the problem)

C. Allow currency to depreciate (but inflationary)

D. Reimpose capital controls (but probably not very effective)

Early Warning Indicators of Currency Crashes

Sachs, Tornell & Velasco (1996), “Financial Crises in Emerging Markets: The Lessons from 1995”:

Combination of weak fundamentals (Δ RER or credit/GDP) and low reserves made countries vulnerable to tequila contagion.

Frankel & Rose (1996), "Currency Crashes in Emerging Markets" :

Composition of capital inflow matters (more than the total): short-term bank debt raises the probability of crash; FDI & reserves lower the probability.

Kaminsky, Lizondo & Reinhart (1998), “Leading Indicators of Currency Crises” :

Best predictors: M2/Res, equity prices, GDP growth, Real Exchange Rate.

Berg, Borensztein, Milesi-Ferretti, & Pattillo (1999), “Anticipating Balance of Payments Crises: The Role of Early Warning Systems”: They don’t hold up as well out-of-sample.

Edwards (2002), “Does the Current Account Matter?”: CA ratios of some use in predicting crises (excl. Africa), contrary to earlier research.

Rose & Spiegel (2009), “The Causes and Consequences of the 2008 Crisis: Early Warning”: No robust predictors.

Frankel & Saravelos (2012): Once again, reserves work to predict who got hit in 2008-09.

The variables that show up as the strongest predictors of country crises in 83 pre-2008 studies are: (i) reserves and (ii) currency overvaluation

0% 10% 20% 30% 40% 50% 60% 70%

Reserves

Real Exchange Rate

GDP

Credit

Current Account

Money Supply

Budget Balance

Exports or Imports

Inflation

Equity Returns

Real Interest Rate

Debt Profile

Terms of Trade

Political/Legal

Contagion

Capital Account

External Debt

% of studies where leading indicator was found to be statistically signficant(total studies = 83, covering 1950s-2009)

Source: Frankel & Saravelos (2010)

IMF Survey Magazine Oct.8, 2009 “Did Foreign Reserves Help Weather the Crisis?” by O. Blanchard, H.Faruqee, & V.Klyuev http://www.imf.org/external/pubs/ft/survey/so/2009/num100809a.htm

The IMF and Rose & Spiegel (2009) found that countries with more reserves were not less affected by the 2008-09 crisis:

But Frankel & Saravelos (2010) and Dominguez & Ito (2011) find they were.

Best and Worst Performing Countries in Global Financial Crisis -- F&S (2010), Appendix 4

-25% -20% -15% -10% -5% 0% 5% 10%

China

India

Morocco

Egypt, Arab Rep.

Indonesia

Jordan

Sri Lanka

Argentina

Poland

Australia

Turkey

Finland

Mexico

Georgia

Russian Federation

Macao, China

Estonia

Ukraine

Latvia

Lithuania

GDP Change, Q2 2008 to Q2 2009

Top 10

Bottom 10

64 countries in sample

Bottom line for Early Warning Indicators in the 2008-09 crisis

Frankel & Saravelos (2012)

• Once again, the best predictor of who got hit was reserve holdings (especially relative to short-term debt),

• Next-best was the Real Exchange Rate.

• This time, current account & national saving too.

• The changes that most EM s (except E. Europe)

had made after the 1990s apparently paid off.

Are big current account deficits dangerous?

Neoclassical theory: if a country has a low capital/labor ratio or transitory negative shock, a large CAD can be optimal.

In practice: Developing countries with big CADs often get into trouble.Traditional rule of thumb: “CAD > approx. 4% GDP” is a danger signal

“Lawson Fallacy” -- CAD not dangerous if government budget is balanced, so borrowing goes to finance private sector, rather than BD.

Amendment after Mexico crisis of 1994 –CAD not dangerous if BD=0 and S is high, so the borrowing goes to finance private I, rather than BD or C.

Amendment after East Asia crisis of 1997 –CAD not dangerous if BD=0, S is high, and I is well-allocated, so the borrowing goes to finance high-return I, rather than BD or C or empty beach-front condos (Thailand) & unneeded steel companies (Korea).

Amendment after Global Financial Crisis of 2008-11 – CAD dangerous.

Appendices: More on predictors of crashes

1. Definitions (CA reversal, sudden stop, speculative attack…)

2. Predicting the 1994 Mexican peso crisis

3. How well did the pre-1997 EWI equations do at predicting the East Asia crisis?

4. The best Early Warning Indicator: Reserves

5. How well did the pre-2008 equations do at predicting who got hit in the 2008-09 Global Financial Crisis?

Appendix 1: Definitions

• Current Account Reversal disappearance of a previously substantial CA deficit

• Sudden Stop sharp disappearance of private capital inflows, reflected (esp. at 1st) as fall in reserves & (soon) in disappearance of a previously substantial CA deficit. Often associated with recession. • Speculative attack sudden fall in demand for domestic assets, in anticipation of abandonment of peg.

Reflected in combination of s - res & i >> 0. (Interest rate defense against speculative attack might be successful.)

• Currency crisis Exchange Market Pressure s - res >> 0. • Currency crash s >> 0, e.g., >25%.

References

• Currency account reversals– Edwards (2004a, b) and

Milesi-Ferretti & Razin (1998, 2000).

• Sudden stops– References: Dornbusch, Goldfajn & Valdes (1995);

Calvo (1998); Calvo, Izquierdo and Mejia (2003); Arellano & Mendoza (2002), Calvo (2003), Calvo, Izquierdo & Talvi (2003, 2006), Calvo & Reinhart (2001), Calvo , Izquierdo & Loo-Kung ( 2006 ), Guidotti, Sturzenegger & Villar (2004), Mendoza (2002, 2006); Edwards (2004b); Calvo, Izquierdo & Loo-Kung (2006).

Appendix 2The early 1990s

Calvo, Leiderman & Reinhart“predict the peso crisis”

In the 1990s, capital inflows financed current account deficits.

Calvo, Leiderman & Reinhart:Source of capital flows was low i* at least as much as local reforms => Could reverse as easily as in 1982.

Dornbusch (1994) said the Mexican peso was overvalued.

Appendix 3:Predictive performance

of Early Warning indicators in the1990s crises.

Berg, et al, (1999) did find that if warning indicator

equation sounds an alarm, probability of crisis is 70-89%;

but were generally pessimistic on the ability at each round

to predict the next crisis.

Copyright 2007 Jeffrey Frankel, unless otherwise noted

API-120 - Macroeconomic Policy Analysis I Professor Jeffrey Frankel, Kennedy School of Government, Harvard University

Appendix 4: Reserves as Early Warning Indicator





Traditional denominator to gauge reserves: imports

Rodrik (2006)

Most Emerging Market countries added rapidlyto reserves after the currency crises of the 1990s.

2003-07: This time, China and India shared in the inflows.But capital inflows to EM s financed only reserve accumulation,

not current account deficits as in the past.

Source: IMF WEO, 2007

FX Reserves in the BRICs, 2000-2011

Neil Bouhan & Paul Swartz, Council on Foreign Relations

28

Appendix 5: Did the pre-2008 equations predict who got hit in the Global Financial Crisis of Sept. 2008?

• Obstfeld, Shambaugh & Taylor (2009a, b):• Finding: A particular measure of countries’ reserve holdings just

before the current crisis, relative to requirements (M2), predicts 2008 depreciation.

• Current account balances & short-term debt levels are not significant predictors, once reserve levels are taken into account.

• Rose & Spiegel (2009a, b) and Blanchard (2009) found no role for reserves in predicting who got into trouble.

• Frankel & Saravelos (JIE, 2012): We get stronger results. We define the crisis period to have gone through March 2009.

29

Table 1

Leading Indicator1 KLR

(1998) 2

Hawkins & Klau (2001)3

Abiad (2003)4,6

Others5,

6 Total

Reserves a 14 18 13 5 50

Real Exch.Rate b 12 22 11 3 48

GDP c 6 15 1 3 25

Credit d 5 8 6 3 22

Current Acct. e 4 10 6 2 22

Money Supply f 2 16 1 0 19

Exports or Imports 1a, g 2 9 4 2 17

Inflation 5 7 1 2 15

Top 8 categories of Leading Indicators in pre-2008-crisis literature

Frankel Frankel & & Saravelos (2012)Saravelos (2012)

30

Table 1, continued

Leading Indicator1 KLR

(1998) 2

Hawkins & Klau (2001)3

Abiad (2003)4,6 Others5,6 Total

Next 9 categories of Leading Indicators in pre-2008-crisis literature

Frankel & Saravelos (2012)Frankel & Saravelos (2012)

Equity Returns 1 8 3 1 13

Real Interest Rateh 2 8 2 1 13

Debt Compositn1b, i 4 4 2 0 10

Budget Balance 3 5 1 0 9

Terms of Trade 2 6 1 0 9

Contagionj 1 5 0 0 6

Political/Legal 3 2 1 0 6

Capital Flows1c, k 3 0 0 0 3

External Debtl 0 1 1 1 3

Number of Studies 28 28 20 7 83

31

NotesFrankel & Saravelos Frankel & Saravelos (2012)(2012)

1, 1a, 1b, 1c Leading indicator categories as in Hawkins & Klau (2000), with exception of 1aincludes imports, 1bdebt composition rather than debt to international banks, 1ccapital flows rather than capital account.2As reported in Hawkins & Klau (2000), but M2/reserves added to reserves, interest differential added to real interest rate. 3S&P, JP Morgan, IMF Indices, IMF Weo, IMF ICM, IMF EWS studies have been excluded due to lack of verifiability of results. The following adjustments have been made to the authors’ checklist: significant credit variables reduced from 10 to 8 as Kaminsky (1999) considers level rather than growth rate of credit; significant capital account variables reduced from 1 to 0 as Honohan (1997) variable not in line with definition used here; Kaminsky (1999) significant variables for external debt reclassified to debt composition as these variables relate to short-term debt.410 out of 30 studies excluded from analysis. 7 included in Hawkins & Klau (2000) and 3 due to absence of formal testing of variables.5Includes Berg, Borenzstein and Pattillo (2004), Manasse and Roubini (2005), Shimpalee and Breuer (2006), Davis and Karim (2008), Bergmen et.al. (2009), Obstfeld, Shambaugh and Taylor (2009), Rose and Speigel (2009a).6See App. 1 for criteria defining statistical significance in Abiad (2003) and Others studies. For rest see KLR (1998), Hawkins & Klau (2001)

Variables included in the leading indicator categories:aReserves: relative to GDP, M2, short-term debt, 12m change hReal Interest Rate: domestic or differential

bReal Exchange Rate: change, over/under valuation iDebt Composition: commercial/concess./variable-rate/debt to internat. banks/short-term/multilat./official relative to total external debt. Short-term debt relative to reserves (rather than relative to total external debt) is in the reserves category

cGDP: growth, level, output gap

dCredit: nominal or real growth

eCurrent Account: CA/GDP, Trade Balance/GDP jContagion: dummies for crisis elsewhere

fMoney Supply: growth rate, excess M1 balances kCapital Flows: FDI, short-term capital flows

gExports or Imports: relative to GDP, growth lExternal Debt: relative to GDP

Table Appendix 6

Coefficients of Bivariate Regressions of Crisis Indicators on Each Independent Variable* (t-stat in parentheses)bolded number indicates statistical signficance at 10% level or lower, darker color shading equivalent to higher statistical significance

Currency Market

Equity Market

Recourse to IMF

Industrial Production

GDPSignificant and

Consistent Sign?^

Independent Variable

Reserves (% GDP)0.082 (2.52)

0.850 (1.6)

-1.020 (-1.92)

0.155 (2.22)

0.008 (0.27)

Yes

Reserves (% external debt)-0.000 (-1.42)

0.000 (2.11)

-0.010 (-3.42)

0.000 (3.62)

0.000 (3.07)

Yes

Reserves (in months of imports)0.002 (1.58)

0.103 (4.71)

-0.089 (-3.31)

0.006 (1.48)

0.001 (0.75)

Yes

M2 to Reserves0.000 (0.14)

-0.026 (-3.81)

-0.067 (-1)

-0.001 (-2.46)

0.000 (1.44)

Yes

Short-term Debt (% of reserves)-0.000 (-2.6)

-0.007 (-4.45)

0.000 (1.18)

-0.000 (-1.7)

-0.000 (-2.93)

Yes

REER (5-yr % rise)-0.293 (-5.4)

-0.303 (-0.32)

0.889 (0.99)

-0.000 (-0.01)

-0.029 (-0.85)

REER (Dev. from 10-yr av)-0.292 (-2.93)

-0.920 (-0.81)

0.671 (0.58)

-0.000 (-0.01)

-0.041 (-0.91)

GDP growth (2007, %)0.003 (1.7)

0.078 (1.58)

0.039 (1.63)

0.010 (2.59)

-0.002 (-1.21)

Yes

GDP Growth (last 5 yrs)0.002 (1.08)

0.118 (2.14)

0.052 (1.68)

0.009 (2.14)

-0.003 (-1.21)


0.087 (1.06)

0.042 (1.2)

0.016 (2.63)

-0.004 (-0.76)

GDP per capita (2007, constant 2000$)-0.003 (-0.7)

-0.296 (-4.69)

-0.221 (-3.23)

-0.027 (-2.48)

-0.010 (-1.74)

Change in Credit (5-yr rise, % GDP)-0.029 (-0.83)

-1.979 (-5.42)

0.139 (0.37)

-0.092 (-1.67)

-0.065 (-2.34)

Yes


-0.904 (-3.9)

-0.011 (-0.08)

-0.046 (-1.58)

-0.019 (-1.13)

Yes

Credit Depth of Information Index (higher=more)-0.005 (-1.34)

-0.115 (-1.72)

0.009 (0.19)

0.006 (0.57)

-0.003 (-0.47)

Bank liquid reserves to bank assets ratio (%)0.000 (1.52)

0.022 (1.51)

-0.000 (-13.97)

0.002 (2.34)

0.001 (2.58)

Yes

Current Account (% GDP)0.001 (1.57)

0.032 (2.18)

-0.032 (-3.46)

0.000 (0.42)

0.000 (0.78)

Yes

Current Account, 5-yr Average (% GDP)0.001 (1.31)

0.030 (1.66)

-0.032 (-2.76)

0.000 (0.53)

0.000 (0.42)


0.034 (1.46)

-0.038 (-2.63)

0.000 (0.15)

0.001 (1.59)

Net National Savings (% GNI)0.000 (0.9)

0.048 (4.5)

-0.020 (-1.88)

0.003 (2.42)

0.002 (2.92)

Yes

Gross National Savings (% GDP)0.000 (0.76)

0.047 (3.9)

-0.028 (-2.51)

0.003 (1.99)

0.002 (2.52)

Yes

Change in M3 (5-yr rise, % GDP)0.000 (0.16)

-0.018 (-1.41)

-0.001 (-0.14)

-0.002 (-1.49)

-0.001 (-1.05)


-0.023 (-1.5)

0.007 (0.63)

-0.002 (-1.14)

-0.001 (-0.91)

Trade Balance (% GDP)0.000 (0.44)

0.013 (1.2)

-0.018 (-2.38)

-0.000 (-0.78)

0.000 (0.01)

Exports (% GDP)0.000 (0.2)

-0.004 (-1.42)

-0.004 (-1.08)

-0.000 (-1.21)

-0.000 (-1.42)

Imports (% GDP)-0.000 (-0.04)

-0.007 (-1.67)

0.003 (1.01)

-0.000 (-1.18)

-0.000 (-1.46)

Inflation (average, last 5 yrs)0.000 (0.36)

0.080 (3.33)

-0.000 (-2.91)

0.003 (1)

-0.000 (-0.23)

Yes

Inflation (average, last 10 yrs)-0.000 (-1.25)

0.038 (1.81)

-0.000 (-0.92)

0.000 (0.03)

0.000 (0.31)

Stock Market (5 yr % change)-0.004 (-1.05)

0.022 (0.99)

0.046 (1.04)

0.001 (0.37)

-0.000 (-0.14)

Stock Market (5 yr return/st. dev.)-0.012 (-0.59)

-0.166 (-0.74)

0.436 (1.47)

-0.005 (-0.22)

-0.004 (-0.2)

Real Interest Rate-0.000 (-0.46)

0.036 (3.18)

0.006 (0.36)

0.001 (0.87)

0.004 (2.07)

Yes

Deposit Interest Rate-0.005 (-2.08)

0.107 (2.84)

0.001 (0.18)

0.002 (0.99)

-0.000 (-0.49)

Short-term Debt (% of exports)-0.000 (-0.88)

-0.023 (-3.66)

0.000 (0.09)

-0.000 (-2.03)

-0.001 (-3.99)

Yes

Short-term Debt (% of external debt)-0.001 (-1.41)

-0.014 (-0.64)

0.001 (0.18)

-0.000 (-0.2)

-0.000 (-0.26)

Public Debt Service (% of exports)0.001 (3.3)

0.022 (0.85)

-0.004 (-0.44)

-0.001 (-0.76)

0.003 (1.41)

Public Debt Service (% GNI)0.001 (3.02)

-0.010 (-0.33)

-0.031 (-0.83)

-0.005 (-0.68)

0.008 (1.1)

Multilateral Debt Service (% Public Debt Service)0.000 (1.41)

-0.001 (-0.2)

0.004 (1)

0.000 (0.97)

0.000 (0.65)

Aid (% of GNI)0.000 (2.67)

-0.019 (-0.93)

0.001 (0.18)

0.002 (1.09)

-0.001 (-0.09)

Financing via Int. Cap. Markets (gross, % GDP)0.000 (0.79)

-0.026 (-1.1)

-0.003 (-0.45)

0.001 (0.39)

-0.008 (-2.61)

Legal Rights Index (higher=more rights)-0.009 (-2.71)

-0.125 (-2.58)

-0.040 (-0.91)

-0.006 (-1.45)

-0.005 (-1.8)

Yes

Business Extent of Disclosure Index (higher=more disclosure)

-0.005 (-1.61)

-0.009 (-0.18)

-0.023 (-0.62)

0.006 (1.38)

0.002 (1.15)

Portfolio Flows (% GDP)-0.499 (-2.92)

0.344 (0.11)

1.433 (0.55)

0.726 (1.38)

-0.474 (-0.57)

FDI net inflows (% GDP)-0.000 (-0.67)

-0.003 (-3.73)

0.000 (0.2)

-0.000 (-15.13)

-0.000 (-1.52)

Yes

FDI net outflows (% GDP)0.000 (0.24)

0.002 (5.59)

0.001 (0.61)

0.000 (13.09)

0.000 (1.31)

Yes

Net FDI (% GDP)-0.000 (-0.05)

0.004 (0.97)

0.004 (0.43)

0.001 (7.06)

-0.000 (-0.05)

External Debt Service (% GNI)0.000 (0.76)

-0.058 (-2.39)

-0.007 (-0.65)

-0.001 (-0.74)

-0.005 (-6.32)

Yes

Present Value of External Debt (% exports)0.000 (0.31)

-0.007 (-3.99)

-0.000 (-0.08)

-0.000 (-1.67)

-0.000 (-2.77)

Yes

Present Value of External Debt (% GNI)0.000 (0.11)

-0.014 (-3.7)

-0.000 (-0.61)

-0.000 (-1.29)

-0.000 (-4.77)

Yes

Peg (1 = peg)0.057 (3.41)

-0.577 (-2.47)

-0.363 (-1.48)

-0.053 (-2.17)

-0.021 (-1.55)

Financial Openness (0=open)0.023 (1.34)

0.899 (4.56)

0.230 (1.03)

0.085 (1.6)

0.020 (0.63)

M3 (% GDP)0.000 (4.76)

-0.001 (-0.57)

-0.020 (-4.06)

0.000 (0.81)

0.000 (1.52)

Yes

M2 (% GDP)0.000 (4.21)

-0.001 (-0.59)

-0.019 (-3.88)

0.000 (0.63)

0.000 (1.43)

Yes

Domestic Credit (% GDP)0.012 (0.84)

-0.626 (-4.24)

-0.881 (-4.2)

-0.016 (-0.86)

0.004 (0.45)

Domestic Credit Provided by Banks (% GDP)0.000 (1.09)

-0.005 (-3.59)

-0.009 (-4.44)

-0.000 (-1.14)

0.000 (0.51)

Domestic Credit to Priv. Sector (% GDP)0.000 (0.58)

-0.006 (-4.92)

-0.014 (-4.19)

-0.000 (-1.03)

-0.000 (-0.32)

Market Cap of Listed Companies (% GDP)0.000 (1.86)

0.000 (0.28)

-0.010 (-1.91)

0.000 (0.45)

0.000 (1.66)

Yes

Euro Area-0.009 (-1.06)

-0.901 (-4.9)

--0.055 (-2.29)

-0.006 (-0.68)

Yes

Low Income Country0.021 (1.16)

0.729 (2.45)

0.376 (1.54)

- -

Middle Income-0.025 (-1.58)

0.821 (3.7)

0.398 (1.85)

0.067 (3.19)

0.017 (1.17)

Upper Income0.013 (0.86)

-0.982 (-4.83)

-1.079 (-3.27)

-0.067 (-3.19)

-0.017 (-1.17)

OECD-0.042 (-2.29)

-0.709 (-3.69)

-0.478 (-1.27)

-0.051 (-2.39)

-0.005 (-0.47)

Yes

South Asia0.063 (3.63)

0.799 (2.71)

0.185 (0.4)

0.195 (17.65)

0.015 (0.37)

Yes

Europe & Central Asia-0.078 (-4.9)

-1.038 (-5.13)

0.306 (1.34)

-0.071 (-3.45)

-0.052 (-4.29)

Yes

Middle East & North Africa0.074 (4.18)

0.092 (0.31)

-0.673 (-1.39)

0.058 (2.03)

0.074 (5.63)

Yes

East Asia & Pacific0.017 (0.8)

0.494 (1.75)

-0.953 (-2.12)

0.056 (1.55)

0.038 (2.64)

Yes

Sub-Saharan Africa-0.049 (-2.12)

0.549 (2.79)

0.513 (2.17)

0.068 (5.93)

0.017 (2.47)

Latin America & Carribean0.024 (0.94)

-0.634 (-1.53)

-0.320 (-0.81)

-0.018 (-0.73)

-0.046 (-1.82)

North America0.016 (0.26)

-1.003 (-5.2)

--0.027 (-2.25)

0.006 (0.91)

Yes

*OLS with heteroscedaticity robust standard errors performed for four continuous variables; probit for IMF recourse variable^At least two statistically signficant coefficients, of which all must have consistent sign (consistent = same sign, with exception of coefficient on IMF recourse variable, which should have opposite sign)

CAPITAL

FLOWS

EXT DEBT

INCOME

REGI

ON

FINANCIAL MKT

DEVELOPMENT

RESERVES

REER

GDP

CURRENT

ACCOUNT

TRADE

INFL.

DEBT COMPOSITI

ON

INT

RATE

CREDIT

STOCK

MKT

MONEY

F & Saravelos (2010): Bivariate

Exchange Market

Pressure

Currency % Changes

(H208-H109

Recourse to IMF

(SBA only)

Equity %Chng (Sep08-Mar09)

Equity % Chng

(H208-H109)

Significant and

Consistent Sign?^

Independent Variable

Reserves (% GDP)0.164 (3.63)

0.087 (2.98)

-1.069 (-1.66)

0.011 (0.12)

0.010 (0.14)

Yes

Reserves (% external debt)0.000 (1.06)

0.000 (1.1)

-0.006 (-2.29)

0.000 (1.81)

0.000 (2.65)

Yes

Reserves (in months of imports)0.004 (2.25)

0.003 (1.95)

-0.119 (-3.01)

0.006 (1.32)

0.009 (2.32)

Yes

M2 to Reserves0.000 (0.27)

0.000 (0.76)

-0.044 (-0.91)

0.000 (0.02)

-0.000 (-0.09)

Short-term Debt (% of reserves)-0.000 (-1.97)

-0.000 (-4.22)

0.000 (2.13)

-0.001 (-2.89)

-0.001 (-3.11)

Yes

REER (5-yr % rise)-0.440 (-5.55)

-0.210 (-3.19)

1.728 (2.15)

-0.182 (-1.24)

-0.185 (-1.61)

Yes

REER (Dev. from 10-yr av)-0.475 (-3.96)

-0.230 (-2.47)

2.654 (2.56)

-0.316 (-1.71)

-0.316 (-2.1)

Yes

GDP growth (2007, %)-0.000 (-0.2)

0.001 (0.94)

0.070 (2.58)

-0.001 (-0.1)

-0.007 (-0.71)

GDP Growth (last 5 yrs)-0.003 (-0.81)

0.000 (0.26)

0.084 (2.4)

-0.003 (-0.26)

-0.014 (-1.15)


0.001 (0.43)

0.064 (1.66)

-0.012 (-0.67)

-0.020 (-1.12)


-0.035 (-0.98)

0.552 (1.02)

-0.274 (-2.97)

-0.248 (-4.13)

Yes


-0.011 (-1.05)

0.210 (1.03)

-0.089 (-1.65)

-0.089 (-2.35)

Credit Depth of Information Index (higher=more)-0.008 (-1.06)

0.000 (0.05)

0.224 (2.4)

-0.006 (-0.37)

-0.018 (-1.33)

Bank liquid reserves to bank assets ratio (%)0.000 (3.84)

0.000 (0.5)

-0.000 (-11.44)

-0.002 (-0.54)

-0.002 (-0.79)

Yes

Current Account (% GDP)0.001 (1.48)

0.002 (2.7)

-0.023 (-2.09)

0.009 (3.84)

0.007 (3.95)

Yes


0.001 (1.82)

-0.025 (-1.72)

0.007 (2.4)

0.006 (2.74)

Yes


0.002 (1.39)

-0.035 (-2.11)

0.008 (2.21)

0.007 (2.44)

Yes

Net National Savings (% GNI)0.002 (1.6)

0.001 (2.33)

-0.013 (-1.22)

0.006 (2.92)

0.004 (2.28)

Yes

Gross National Savings (% GDP)0.003 (2.01)

0.001 (2.53)

-0.015 (-1.36)

0.008 (3.42)

0.006 (3.03)

Yes


-0.000 (-0.16)

-0.000 (-0.08)

-0.004 (-1.08)

-0.004 (-2.79)


-0.000 (-0.29)

0.006 (0.51)

-0.005 (-1.25)

-0.006 (-2.86)

Trade Balance (% GDP)0.001 (1.73)

0.001 (1.78)

-0.014 (-1.51)

0.006 (2.72)

0.003 (1.97)

Yes

Exports (% GDP)0.000 (0.93)

0.000 (1.97)

-0.002 (-0.53)

0.000 (0.02)

-0.000 (-0.83)

Imports (% GDP)-0.000 (-0.15)

0.000 (0.57)

0.002 (0.79)

-0.000 (-0.73)

-0.000 (-1.36)


-0.001 (-0.75)

0.094 (3.4)

0.000 (0.01)

0.002 (0.26)

Yes


-0.001 (-1.54)

0.017 (2.04)

-0.000 (-0.16)

0.000 (0.18)

Yes

Stock Market (5 yr % change)-0.006 (-0.86)

-0.006 (-1.34)

0.035 (0.74)

-0.016 (-3.72)

-0.018 (-5.59)

Yes

Stock Market (5 yr return/st.dev.)0.010 (0.31)

-0.024 (-1.02)

-0.394 (-1.17)

-0.097 (-1.92)

-0.042 (-0.93)

Real Interest Rate-0.001 (-0.79)

-0.000 (-0.42)

-0.022 (-1.05)

0.005 (1.81)

0.004 (1.85)

Yes

Deposit Interest Rate-0.014 (-4.43)

-0.003 (-1.72)

0.058 (1.78)

0.019 (3.33)

0.009 (1.39)

Short-term Debt (% of exports)-0.000 (-0.04)

-0.000 (-1.43)

0.000 (0.36)

-0.004 (-3.28)

-0.003 (-2.82)

Yes

Short-term Debt (% of external debt)-0.001 (-1.41)

-0.001 (-2.1)

0.009 (1.17)

-0.001 (-0.34)

-0.000 (-0.03)

Public Debt Service (% of exports)0.002 (3.04)

0.000 (1.18)

-0.036 (-1.14)

0.008 (1.22)

0.005 (0.98)

Public Debt Service (% GNI)0.001 (2.37)

0.000 (0.97)

-0.050 (-0.71)

0.003 (0.33)

0.002 (0.3)

Multilateral Debt Service (% Public Debt Service)0.001 (1.77)

0.000 (0.52)

0.001 (0.17)

-0.001 (-1.05)

0.000 (0.01)

Aid (% of GNI)0.002 (2.81)

0.000 (1.22)

-0.141 (-3.23)

-0.007 (-0.77)

-0.001 (-0.15)

Yes

Financing via Int. Cap. Markets (gross, % GDP)-0.000

(0)-0.000 (-0.48)

-0.011 (-0.57)

-0.012 (-2.14)

-0.005 (-1)

Legal Rights Index (higher=more rights)-0.009 (-1.49)

-0.006 (-1.46)

0.008 (0.15)

-0.017 (-1.52)

-0.015 (-1.78)

Business Extent of Disclosure Index (higher=more disclosure)

-0.002 (-0.39)

-0.001 (-0.32)

-0.024 (-0.52)

-0.001 (-0.13)

-0.000 (-0.1)

Portfolio Flows (% GDP)-0.616 (-2.88)

-0.435 (-3.33)

2.090 (0.74)

-0.979 (-0.77)

-0.889 (-0.77)

Yes

FDI net inflows (% GDP)-0.000 (-2.05)

-0.000 (-0.87)

-0.000 (-0.04)

-0.000 (-2.57)

-0.000 (-2.05)

Yes

FDI net outflows (% GDP)0.000 (1.8)

0.000 (0.81)

-0.000 (-0.45)

0.000 (3.38)

0.000 (2.84)

Yes

Net FDI (% GDP)0.001 (1.15)

0.000 (0.44)

-0.002 (-0.27)

-0.000 (-0.13)

-0.000 (-0.27)

External Debt Service (% GNI)0.000 (0.91)

0.000 (0.05)

-0.000 (-0.04)

-0.016 (-5.11)

-0.013 (-4.87)

Yes

Present Value of External Debt (% exports)0.000 (0.08)

-0.000 (-0.38)

-0.000 (-0.06)

-0.001 (-3.55)

-0.001 (-3.92)

Yes

Present Value of External Debt (% GNI)0.000 (0.16)

-0.000 (-0.82)

0.000 (0.38)

-0.003 (-4.39)

-0.002 (-3.8)

Yes

Peg (1 = peg)0.100 (3.89)

0.055 (3.34)

-0.577 (-1.89)

-0.075 (-1.67)

-0.041 (-1.04)

Yes

Financial Openness (0=open)0.083 (2.76)

0.023 (1.16)

-0.587 (-1.72)

0.059 (0.68)

0.003 (0.05)

Yes

M3 (% GDP)0.001 (4.12)

0.000 (4.47)

-0.020 (-3.45)

0.000 (0.31)

-0.000 (-0.22)

Yes

M2 (% GDP)0.001 (4.24)

0.000 (4.78)

-0.022 (-3.43)

0.000 (0.4)

-0.000 (-0.03)

Yes

Domestic Credit (% GDP)0.040 (1.53)

0.009 (0.61)

-0.593 (-2.66)

-0.010 (-0.22)

-0.027 (-0.62)

Domestic Credit Provided by Banks (% GDP)0.000 (1.81)

0.000 (1.52)

-0.006 (-3.17)

-0.000 (-0.21)

-0.000 (-0.55)

Yes

Domestic Credit to Priv. Sector (% GDP)0.000 (1.87)

0.000 (1.51)

-0.012 (-3.13)

-0.000 (-0.5)

-0.000 (-0.87)

Yes

Market Cap of Listed Companies (% GDP)0.000 (1.65)

0.000 (2.01)

-0.006 (-1.41)

0.000 (1.35)

0.000 (1.47)

South Asia0.045 (0.81)

0.045 (2.12)

0.476 (0.99)

0.158 (1.81)

0.033 (0.54)

Yes

Europe & Central Asia-0.150 (-4.43)

-0.095 (-5.61)

0.636 (2.09)

-0.202 (-4.43)

-0.167 (-4.64)

Yes

Middle East & North Africa0.080 (2.7)

0.061 (2.86)

-0.003 (0.05)

0.049 (0.84)

Yes

East Asia & Pacific0.071 (2.71)

0.034 (1.58)

-0.629 (-1.34)

0.135 (2.63)

0.054 (1.08)

Yes

Sub-Saharan Africa-0.006 (-0.14)

-0.024 (-0.83)

-0.424 (-0.98)

-0.068 (-0.89)

0.047 (0.72)

Latin America & Carribean-0.014 (-0.23)

-0.013 (-0.39)

0.205 (0.47)

-0.049 (-0.84)

-0.048 (-0.93)

North America0.061 (0.92)

0.041 (0.91)

-0.030 (1.1)

0.024 (0.95)

*OLS with heteroscedasticity robust standard errors performed for four continuous variables; probit for IMF recourse variable^At least two statistically signficant coefficients, of which all must have consistent sign (consistent = same sign, with exception of coefficient on IMF recourse variable, which should have opposite sign)

RESERVES

REER

GDP

CURRENT

ACCOUNT

CREDIT

MONEY

STOCK

MKT

TRADE

INFL.

DEBT COMPOSITI

ON

INT

RATE

CAPITAL

FLOWS

EXT DEBT

REGI

ON

FINANCIAL MKT

DEVELOPMENT

F & Saravelos (2010): Multivariate

Table Appendix 7

Coefficients of Regressions of Crisis Indicators on Each Independent Variable and GDP per Capita* (t-stat in parentheses)bolded number indicates statistical signficance at 10% level or lower

34

Actual versus Predicted Incidence of 2008-09 CrisisFrankel & Saravelos (2010)

AlgeriaAustralia

BoliviaBulgaria

Burundi

CanadaChile

China

Colombia

Costa Rica

Croatia

Czech Rep.

Denmark

Dom. Republic

Finland

France

Gabon

Gambia

Georgia

Germany Greece

Guyana

HungaryIceland

IrelandIsrael Italy

Japan

Luxembourg

Malawi

Malaysia

Morocco

Netherlands

New Zealand

Nicar

Nigeria

Norway

Pakistan

Paraguay

Philippines

Poland

Portugal

RomaniaRussia

Saudi ArabiaSingapore

Slovakia

S. Africa

St. Lucia

Sweden

Switzerland

UK

US

UruguayVenezuela

Predicted Resilience to Crisis

Act

ua

l Re

sili

en

ce t

o C

risi

s

lessresilient

more resilient

more resilient

Documents

L21: CRISES IN EMERGING MARKETS : WTP chapter sections: 24.1 INFLOWS TO EMERGING MARKETS -- Reserves (continued from Lecture 3) 24.2 MANAGING OUTFLOWS