This study empirically examines the effect of foreign exchange (FX) market liquidity risk and volatility on the excess returns of currency carry trades. In contrast to the existent literature, we construct an alternative proxy of liquidity risk violations of no arbitrage bounds in the forward and currency swap markets. We also use volatility smile data to capture FX-market specific volatility. ...

This paper studies the causes, mechanisms and consequences of decreasing firm value and welfare loss in an economy under a fixed exchange rate regime when there is an unexpected appreciation in domestic currency. We also study the possible economic crisis caused by the exchange rate shock. We consider the established production capacity as well as the training of firmspecific labors before prod...

Over the past three years, cross-border inflows into emerging market (EM) local currency bonds have surged. The returns on these bonds have moved more closely with those on international assets regarded as “safe”, particularly following the euro area debt crisis. This paper first demonstrates that domestic factors have tended to dictate the dynamics of the EM local currency government yield. Th...

This paper explains a currency crisis as an outcome of a switch in how monetary policy and fiscal policy are coordinated. The paper develops a model of an open economy in which monetary policy starts active, fiscal policy starts passive and, in a particular state of nature, monetary policy switches to passive and fiscal policy switches to active. The probability of the regime switch is endogeno...

The recent financial crises starting from one country (e.g. Mexico in 1994, Thailand in 1997) and spreading as a contagion to others (i.e. the ’tequila’ effect of the Mexican crisis on Argentina and other Latin American countries, the spread to Malaysia, Indonesia, Hong Kong, Korea, Singapore and Taiwan of the Thai crisis, the rapid spread of financial instability after the Russian crisis in th...

The focus of this paper is two fold. Relevant aspects of the Thai crisis are evaluated. This provides the motivation for the incorporation of a fragile banking sector within a Krugman (1979)-type framework. This in turn allows for a consideration of the effects of banking sector vulnerabilities on the speed and timing of a currency collapse.

It is perhaps too glib to record that the 1997–1998 financial crisis represented a watershed for the economies of east Asia. But it is certainly clear that many of the economic policies in the region, which had been viewed in a favourable light in the long years of spectacular economic growth, were reassessed in the light of the crisis. A critical part of this reassessment involved monetary pol...

This article examines the role played by varieties of capitalism in the Euro crisis, considering the origins of the crisis, its progression and the response to it. Deficiencies in the institutional arrangements governing the single currency are linked to economic doctrines of the 1990s. The roots of the crisis are linked to institutional asymmetries between political economies. Northern Europea...

East Asian economies caught in the recent crisis have seen their output contract fiercely despite enormous real exchange rate depreciation. Why are relative prices not maintaining demand and output at pre-crisis levels? We investigate the idea that there are negative supply-side shifts due to balance sheet effects. Specifically, we use the framework of Kiyotaki and Moore (1997) to explore the i...

Application of early warning system (EWS) in predicting crisis has drawn a lot of research interests in earlier literature. Recent studies have shown that the development of new EWS models from different field such as artificial intelligence or expert system achieved better prediction than the old statistical model. This paper analyzes the predictability of new methods for EWS which is the comb...