External Vulnerability in Emerging Market Economies: How High Liquidity can Offset Weak Fundamentals and the Effects of Contagion

Bussière, Matthieu; Mulder, Christian

doi:10.2139/ssrn.217072

Cited by 63 publications

(41 citation statements)

References 6 publications

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“…Bussière and Mulder (1999); Mody and Taylor (2002); Garcia and Soto (2004); Sachs, Tornell, and Velasco (1996);and Chamon, Manasse, and Prati (2007) argue and find support for the proposition that reserves may lower the likelihood of a crisis. Countries with large holdings of reserves may inspire confidence and be less susceptible to panic leading to self-fulfilling crises.…”

Section: Adequacy Of Foreign Reservesmentioning

confidence: 92%

External Shocks and the Adequacy of Foreign Reserves: The Case of Mexico

Nechi

2010

SSRN Journal

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Recent research highlights the presence of significant increases in reserves accumulated by emerging market economies in the last decade and half. This is often viewed as the result of deliberated policies by governments wishing to insure themselves against the risk of balance of payments (hereafter, BOP) crises. Using Mexico as an example, this paper (i) explores the relative importance of external shocks as key determinants of the increase of foreign reserves accumulated since the 1990s, (ii) generates an empirical method aimed at assessing the adequacy of reserve holdings, and (iii) predicts BOP crises forced by external shocks. Using the returns on a set of international financial securities and oil variables to identify exogenous shocks to Mexico, I decompose foreign reserves into those driven by external shocks and those driven by policy targets. I argue that foreign reserves can be approximated as stationary functions of external shocks. In particular, I find that about 70% of the variation in foreign reserves can be replicated by a linear combination of the external shocks. Taking into account the effects of the exogenous shocks on reserves buildup, I develop a new approach to evaluate the adequacy of reserves policy, based on a concept of BOP sustainability that can accommodate a variety of future policy patterns, and allows the stock of reserves to influence the likelihood of BOP crises. According to this approach, aside from 1994, historically Mexico held an adequate level of reserves. However, although the reserves policy in place is adequate (i.e., effective) in the short run, a BOP crisis is more likely in the long run.JEL Classification: F31, F34, F37, G12, G15.

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Section: Adequacy Of Foreign Reservesmentioning

confidence: 92%

External Shocks and the Adequacy of Foreign Reserves: The Case of Mexico

Nechi

2010

SSRN Journal

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“…While these models are less geared toward predicting the exact timing of financial crises, rather, they aim at explaining the severity of financial crises. Blanco and Goiber (1986), Sachs, Tornell and Velasco (1996) or Bussiere and Mulder (1999) are actable examples for this kind of model class.…”

Section: Empirical Researchmentioning

confidence: 98%

The Argentinian Peso Crisis (2014)

Dapontas

2014

Annals of the Alexandru Ioan Cuza University - Economics

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“…Such accusations are actually not new: already in the wake of the Asian crisis, at the end of the 1990s, credit rating agencies have been under pressure for their lack of foresight (Reinhart (2002a); Reinhart et al (2000); Bussiere and Mulder (1999)). The link between credit rating agencies and debt crises is of paramount importance for crisis prevention and resolution, given the role of credit ratings for regulatory purposes and for the conduct of monetary policy 4 .…”

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confidence: 99%

“…Given the importance of the topic, several papers have looked at the predictive power of ratings: Reinhart (2002a) tests whether credit ratings predict currency and banking crises while Bussiere and Mulder (1999) focus on currency crises only. Reinhart (2002b) assesses whether ratings predict currency crises and defaults.…”

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confidence: 99%

Credit Ratings and Debt Crises

Bussière

Ristiniemi

2012

SSRN Journal

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Abstract:This paper analyses the role of credit rating agencies in sovereign debt crises. Using a panel of 53 emerging and developing countries with annual data going back to 1977, the paper shows that credit ratings are not very good predictors of debt distress events once tested against a simple benchmark model with standard macroeconomic variables. Next, the paper turns to higher frequency data for a subset of countries to analyze the link between credit ratings and bond spreads. The results indicate that bond spreads react strongly to credit ratings, especially to downgrades in the non-investment grade category. The results are robust to a variety of additional tests. Keywords:Credit rating agencies, debt crises, fiscal policy, emerging market economies, developing countries, panel estimation. JEL Classification: E60, C33, C35 Résumé :Ce papier analyse le rôle des agences de notation dans les crises de la dette souveraine. Utilisant un panel de 53 pays émergents et en voie de développement avec des données annuelles depuis 1977, le papier montre que les notations de crédit ne sont pas de bons prédicteurs des événements de crédit lorsqu'on les compare à un simple modèle de référence comprenant des variables macroéconomiques usuelles. Dans un second temps, le papier utilise des données à plus haute fréquence pour un sousensemble de pays afin d'analyser le lien entre notations de crédit et spreads. Les résultats indiquent que les spreads réagissent fortement aux changements de notation, surtout lorsqu'elles ont lieu à la baisse et dans la catégorie « non-investissement ». Les résultats restent valides lorsqu'on les soumet à un ensemble de tests supplémentaires.Mots-clés : agences de notation, crises de la dette, politique budgétaire, marchés émergents, pays en voie de développement, économétrie des panels.

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External Vulnerability in Emerging Market Economies: How High Liquidity can Offset Weak Fundamentals and the Effects of Contagion

Cited by 63 publications

References 6 publications

External Shocks and the Adequacy of Foreign Reserves: The Case of Mexico

External Shocks and the Adequacy of Foreign Reserves: The Case of Mexico

The Argentinian Peso Crisis (2014)

Credit Ratings and Debt Crises

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