Using a basic monetary model, we assess the effectiveness of stock prices as a leading indicator of the East Asian currency crisis in 1997 and 1998. Stock prices are incorporated into a monetary model, through the wealth effect postulated by Friedman [J. Pol. Econ. 96 (1988) 221]. In addition to the domestic stock price, we also incorporate the stock prices of Hong Kong, China and Japan. Using monthly data, the results indicate that the domestic stock price, the Hong Kong stock price and particularly US prices are significant leading indicators of the crisis. Causality tests suggest evidence of bi-causality between the stock markets and foreign exchange markets. # 2004 Elsevier Inc. All rights reserved.
JEL classification: F30; E44
In Dumas and Svensson (Journal of International Economics 36 (1994) 467) the lifetime of a Krugman (Quarterly Journal of Economics 106 (1991) 669-682) type target zone model is found to be extremely long. This paper shows that the lifetime of the identical target zone regime can be much lower when real disturbances occur. In particular, the mean lifetime is found to be very low when real disturbances occur and the real exchange rate elasticity of the demand for domestic goods is very low. It is also shown that allowing for monetary disturbances to have real effects has very little effect on the lifetime. The results indicate the conditions under which real disturbances might trigger currency crises.
This paper analyses the stabilising properties of an exchange rate target zone when the stock of available reserves is limited. In these circumstances it is reasonable to suppose that the optimal bandwidth is affected by the expected lifetime of the zone. Our analysis uses Sutherland’s (1995) target zone model to assess the importance of the expected lifetime in determining the optimal width of the zone. We find that the expected lifetime tends to widen the optimal bandwidth considerably but unless the stock of initial reserves is small and/or the fundamentals drift large, the extra lifetime bought is small in percentage terms. Copyright Springer Science + Business Media, Inc. 2005stabilisation policy, exchange rate crises, optimal target zones,
International investment patterns are an important indicator of financial linkages and integration. Country portfolios indicate how nations hold their financial wealth and thus provide information about the productivity and risk of a nation’s economic and financial sectors. This chapter reviews the literature on the composition of country portfolios and examines the asset and liability positions across countries. Many potential explanations of the observed heterogeneity in portfolios are reviewed by examining the extant literature on capital flows and asset allocation models. The chapter also looks at the role of fundamentals and informational asymmetries in restricting international capital flows, and how asset return predictability and investors’ risk aversion affect investors’ asset allocation.
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