International reserves for emerging economies: A liquidity approach

Jung, Kuk Mo; Pyun, Ju Hyun

doi:10.1016/j.jimonfin.2016.06.020

Cited by 15 publications

(4 citation statements)

References 55 publications

(38 reference statements)

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“…(), Wright and Trejos (), Head and Shi (), Bignon et al. (), Geromichalos and Simonovska (), Zhang (), Jung and Pyun (), Herrenbrueck (), and Gomis‐Porqueras et al. (), among others.…”

Section: Introductionmentioning

confidence: 99%

An Over‐the‐counter Approach to the Forex Market

Geromichalos

Jung

2018

Int Economic Review

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The foreign exchange (FOREX) market is an over-the-counter market characterized by intermediation and significant bid-ask spreads. However, most of the existing international macroeconomics literature models the FOREX as a standard Walrasian market. This article constructs a dynamic general equilibrium model of intermediation in the FOREX market. We use our framework to compute standard measures of FOREX liquidity, such as bid-ask spreads and trade volume, and study how they are affected by macroeconomic fundamentals and market microstructure. We also study how FOREX market microstructure affects the volume of international trade and, consequently, welfare. Our empirical exercise offers support to the models' main predictions. * Manuscript

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“…(), Wright and Trejos (), Head and Shi (), Bignon et al. (), Geromichalos and Simonovska (), Zhang (), Jung and Pyun (), Herrenbrueck (), and Gomis‐Porqueras et al. (), among others.…”

Section: Introductionmentioning

confidence: 99%

An Over‐the‐counter Approach to the Forex Market

Geromichalos

Jung

2018

Int Economic Review

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“…(), Han et al. (), Jung and Pyun () and Johnson (). Lagos () shows that a model in which assets can help agents facilitate trade in frictional markets can be key to rationalizing the equity premium puzzle.…”

Section: Introductionmentioning

confidence: 99%

“…Our paper is related to a growing literature that studies how asset liquidity affects equilibrium prices. A non-exhaustive list includes Geromichalos et al (2007), Ferraris and Watanabe (2011), Jacquet and Tan (2012), Nosal and Rocheteau (2013), Andolfatto and Martin (2013), Rocheteau and Wright (2013), Venkateswaran and Wright (2013), Andolfatto et al (2014), Geromichalos, Lee, et al (2016, Han et al (2016), Jung and Pyun (2016) and Johnson (2016). Lagos (2010) shows that a model in which assets can help agents facilitate trade in frictional markets can be key to rationalizing the equity premium puzzle.…”

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confidence: 99%

Monetary policy and efficiency in over‐the‐counter financial trade

Geromichalos¹,

Jung

2019

Canadian J of Economics

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We develop a monetary model that incorporates over-the-counter (OTC) asset trade. After agents have made their money holding decisions, they receive an idiosyncratic shock that affects their valuation for consumption and, hence, for the unique liquid asset, namely money. Subsequently, agents can choose whether they want to enter the OTC market in order to sell assets and thus boost their liquidity or to buy assets and thus provide liquidity to other agents. In our model, inflation affects not only the money holding decisions of agents, as is standard in monetary theory, but also the entry decision of these agents in the financial market. We use our framework to study the effect of inflation on welfare, asset prices and OTC trade volume. In contrast to most monetary models, which predict a negative relationship between inflation and welfare, we find that inflation can be welfare improving within a certain range, because it mitigates a search externality that agents impose on one another when they make their OTC market entry decision. Also, an increase in the holding cost of money will lead to a decrease in asset prices, a regularity that is well documented in the data and often considered anomalous.Résumé. Politique monétaire et efficacité sur le marché financier de gré à gré. Dans cet article, nous développons un modèle monétaire intégrant la vente d'actifs négociés de gré à gré. Après encaisse, les agents subissent un choc idiosyncratique qui affecte leur appétence pour la consommation et donc pour les actifs liquides, autrement dit l'argent. Consécutivement, les agents peuvent soit décider d'accéder au marché hors cote pour vendre des actifs afin d'accroître leurs liquidités, soit d'acheter des actifs pour fournir des liquidités aux autres agents. Dans notre modèle, et conformément à la théorie monétaire, l'inflation n'affecte pas seulement les décisions des agents en matière d'encaisse, mais aussi leur décision d'accéder au marché financier. Nous utilisons notre propre cadre pour étudier les effets de l'inflation sur le bien-être, le prix des actifs et le volume des échanges négociés hors marché. Les modèles monétaires établissent pour la plupart une relation négative entre l'inflation et le niveau de bien-être; néanmoins, et contrairement à ces modèles, nous avons découvert que l'inflation pouvait améliorer le niveau de bien-être en réduisant la recherche d'externalité que s'imposent les agents entre eux lorsqu'ils intègrent le marché de gré à gré. De même, l'augmentation des coûts liés à la détention Corresponding author: Kuk Mo Jung, kmjung@sogang.ac.krWe would like to thank the editor, Francisco Ruge-Murcia and two anonymous referees for their useful comments and suggestions. The authors did not receive financial support related to this project from any institution.

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“…The problem is not the capital flow itself but the rapid reversal of capital as has been happening in recent times. Evidence favours countries with large reserves to be able to withstand currency crisis than those with smaller reserves (Bird and Rajan, 2003;Aizenman and Lee, 2007;Jung and Pyun, 2016;Silva Jr, 2016). Nowak, Hviding and Ricci (2004) confirmed this assertion when they studied the role of foreign exchange reserves in reducing currency volatility for emerging market countries -28 countries over the period 1986-2002.…”

Section: The Role Of International Reservesmentioning

confidence: 87%

Developing and testing new measures of exchange market pressure in Sub-Saharan Africa

Klutse

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Attempts by economists to identify exchange rate crisis have led to the development of the exchange market pressure (EMP) index, which has been modified to include the interest rate variable, to better capture pressure on domestic currencies. The index in this state (current) is more appropriate for countries who operate an inflation targeting (IT) monetary policy framework or a policy framework close to it. This observation among others makes the EMP index sensitive to some assumptions if sub-Saharan African countries (SSA) are involved. SSA countries employ different monetary policy frameworks making the usage of the EMP index across board misleading. Using different variations of the model specified by authors specialised in the subject, this study identified an EMP index which will be effective in identifying currency crisis in 32 sub-Saharan African (SSA) countries for which data is available. Using a ridge regression model and a dynamic OLS model as a control, the study showed that the original EMP index was good in explaining changes in the exchange rate variable in SSA if the changes in reserves are adjusted for by broad money. The explanatory power is further enhanced if the components are normalised by their standard deviations without adjusting for the money variable. It was discovered that the current version of the index which includes the interest rate variable is not good at explaining changes in the exchange rate variable in SSA even though it had some explanatory effect. Using a discrete threshold regression model this study resolves two major problem associated with the use of the exchange market pressure index in identifying exchange rate crisis. The results point to un-even implementation of the Inflation Targeting framework in the study countries.Dwelling on the assumption that a country will be able to wade of speculative attack on its currency if it has reserves that can cater for previous year's imports or short-term external debt or broad money, this study proposes two variations to the original index by Girton and Ropper (1975). Using a Generalised Method of Moments (GMM) regression model and a ridge regression model, this study found the index with the reserve variable adjusted for by imports to have the most explanatory effect on the exchange rate variable in SSA. This study recommends a combination of these indexes since the phase of economic development is not static.In testing the EMP indexes on the banking crisis in Ghana, the retail prices of premium gasoline in Ghana and Kenya and also testing the impact of the exchange rate variable in the debt sustainability of Ghana and Kenya. This study found that the exchange rate vii played a significant role in the banking sector and fluctuations in the retail price of premium gasoline in Ghana in the long run. It was also found to be putting increasing pressure on the gross debt of both Ghana and Kenya. The study recommends the creating of domestic buffers leading to the accumulation of the needed reserves to smoothen volatilities in the ...

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International reserves for emerging economies: A liquidity approach

Cited by 15 publications

References 55 publications

An Over‐the‐counter Approach to the Forex Market

An Over‐the‐counter Approach to the Forex Market

Monetary policy and efficiency in over‐the‐counter financial trade

Developing and testing new measures of exchange market pressure in Sub-Saharan Africa

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