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Working Paper
The exchange rate exposure of U.S. and Japanese banking institutions
In this paper, we examine the foreign exchange exposure of a sample of U.S. and Japanese banking firms. Using daily data, we construct estimates of the exchange rate sensitivity of the equity returns of the U.S. bank holding companies and compare them to those of a sample of Japanese banks. We find that the stock returns of a significant fraction of the U.S. companies move with the exchange rate, while few of the Japanese returns that we observe do so. We next examine more closely the sensitivity of the U.S. firms by linking the U.S. estimates cross-sectionally to accounting-based ...
Working Paper
Effectiveness of official daily foreign exchange market intervention operations in Japan
Japanese official intervention in the foreign exchange market is of by far the largest magnitude in the world, despite little or no evidence that it is effective in moving exchange rates. Up until recently, however, official data on intervention has not been available for Japan. This paper investigates the effectiveness of intervention using recently published official daily data and an event study methodology. The event study better fits the stochastic properties of intervention and exchange rate data, i.e. intense and sporadic bursts of intervention activity juxtaposed against a yen/dollar ...
Working Paper
Sterilization of capital inflows through the banking sector: evidence from Asia
This paper develops an open-economy version of the Bernanke-Blinder model which indicates that sterilization efforts through increases in reserve requirements will have limited impact if viable financial alternatives to the commercial banking sector exists. We then examine the capital inflow surge experiences of seven developing Asian nations. Our analysis yields three stylized conclusions: First, the timing of capital inflow surges indicates a causal role for both domestic and foreign factors. Second, there is little general rule as to the most effective sterilization instrument. Finally, ...
Working Paper
The disposition of failed Japanese bank assets: lessons from the U.S. savings and loan crisis
This paper reviews the Japanese experience with put guarantees recently offered in the sale of several failed banks. These guarantees, meant to address information asymmetry problems, are shown to create moral hazard problems of their own. In particular, the guarantees make acquiring banks reluctant to accept first-best renegotiations with problem borrowers. These issues also arose in the U.S. Savings and Loan crisis. Regulators in that crisis turned to an alternative guarantee mechanism known as loss-sharing arrangements, with apparently positive results. I introduce a formal debt model to ...
Working Paper
Structural changes and the scope of inflation targeting in Korea
A small, open macroeconomic model that accounts for new financial accelerator effects (the effects of fluctuations in asset prices on bank credit and economic activity) is developed to evaluate various policy rules for inflation targeting. Given conditions in asset markets and the fragility of the financial sector, monetary policy responses can potentially amplify the financial accelerator effect. Simulations are used to compare various forms of inflation targeting using a model that emphasizes long-term inflation expectations, output changes, and the asset price channels. The simulations ...
Working Paper
Sterilization costs and exchange rate targeting
This paper examines the movements of exchange rates and capital flows in an environment where an optimizing central bank pursuing the joint goals of inflation and output targeting engages in costly sterilization activities. Our results predict that when faced with increased sterilization costs, the central bank will choose to limit its sterilization activities allowing target variables, such as the nominal exchange rate, to adjust. ; We then test the predictions of a linearized version of the saddle-path solution to the model for a cross-country panel of developing countries. We use IV, GMM ...
Working Paper
A cure worse than the disease? currency crises and the output costs of IMF-supported stabilization programs
This paper investigates the output effects of IMF-supported stabilization programs, especially those introduced at the time of a severe balance of payments/currency crisis. Using a panel data set over the 19751997 period and covering 67 developing and emerging market economies (with 461 IMF stabilization programs and 160 currency crises), we find that currency criseseven after controlling for macroeconomic developments and political and regional factorssignificantly reduce output growth for one to two years. Output growth is also lower (0.7 percentage point annually) during IMF stabilization ...
Working Paper
Bank charter value and the viability of the Japanese convoy system
This paper compares the performance of a convoy banking system, similar to that which prevailed in Japan, to a fixed-premium deposit insurance regime. Under this system, failed banks are merged with healthy banks, rather than closed, so that the banking system itself provides the safety net for guaranteed deposits. While neither regime is generally preferable over the other, the results show that the performance of the convoy system is more sensitive to changes in bank charter values and the overall health of the banking system. The recent breakdown of the convoy system may therefore be ...