Free Floating Exchange Rate System Research Articles

Free float and stochastic volatility: the experience of a small open economy

Following a dramatic collapse of a fixed exchange rate based inflation stabilization program, Turkey moved into a free floating exchange rate system in February 2001. In this paper, an asymmetric stochastic volatility model of the foreign exchange rate in Turkey is estimated for the floating period. It is shown that there is a positive relation between the exchange return and its volatility. Particularly, an increase in the return at time t results in an increase in volatility at time t+1. However, the effect is asymmetric: a decrease in the exchange rate return at time t causes a relatively less decrease in volatility at time t+1. The results imply that a central bank with a volatility smoothing policy would be biased in viewing the shocks to the exchange rate in favor of appreciation. The bias would increase if the bank is also following an inflation targeting policy.

SENDİKASYON KREDİLERİ

Loan syndication are one of the most important fund resources in the international financial markets. These credits are extremely important for the economies of developing countries due to the lack of sufficient capital accumulation. Loan syndications have reached considerable amounts in the international financial markets. These credits have many advantages both for the money - lending creditors and borrowing financial institutions. In some cases, this credit method can be risky for financial institutions due to the exchange - rate risk. Some of our national banks have fallen into financial difficulties due to high levels of outside borrowing in the form loan syndication in Turkey recently and the use of these credits with the aim of creating short-positions combined with the high levels of devaluations and the change of exchange rate policy to free floating exchange rate system in Turkey last year.

South Korea’s Financial Crisis in 1997: What Have We Learned?

The South Korean bang in was triggered by both endogenous factors such as moral hazard effects and suboptimal foreign debt management, and negatively affected exogenous factors such as contagion effects of the Asian crisis, co-ordination failure effects and terms of trade shocks. An analysis of the South Korean episode implies that: (1) both sustainability and liquidity ought to be considered for an optimal foreign debt policy, particularly during the liberalization of capital markets; (2) a proper corporate governance, coupled with transparency and increased foreign competition, are important to increase the efficiency of big conglomerates; (3) a mechanism for effective global co-ordination is required to cope with the contagion effect, and to promote integration of developing economies into the world market. I. Introduction The South Korean economic turmoil in 1997 provides an interesting research question: why did the crisis happen in late 1997 and not before? In fact, the South Korean economy has been among the most rapidly growing nations over the period, despite the devastations of the Korean War.1 Trends in overall macroeconomic indicators prior to the crash failed to give any significant warning about the episode.2 In addition, economists, including the Organization for Economic Co-operation and Development (OECD), forecasted that South Korea would continue its economic growth and that the level of per capita income (in current price) would double by 2001 from the level of 1995. In contrast to this forecasting, the South Korean economy experienced severe turmoil in late 1997, and therefore a severe recession is expected. The won, which was relatively stable at around 860 per dollar, depreciated rapidly. As of early March 1998, the reduction of the won's value by about 46 per cent brought about various shocks across the economy (Min 1998).3 With the sharp devaluation of the won and capital flight, South Korea experienced a credit crunch. As a result, it resorted to a bailout by the International Monetary Fund (IMF) and switched its foreign exchange rate system from a Market Average Exchange Rate System (MARS), under which the won-dollar exchange rate changes within a daily trading margin, to the free floating exchange rate system.4 This article aims (1) to analyse the economic causes of the turmoil, and (2) to find some implications both for domestic industry policy and for international economics. South Korea experienced negative growth and a high debt ratio in the early 1980s without a capital flight. Thus, special attention will be placed on the different economic environments of the current crisis and the early 1980s, and how these differences precipitated the crisis. Section II describes the analytical framework for the study. Sections III and IV analyse various causes of the turmoil and economic effects. The final section is a summary and conclusion. II. An analytical framework Various economic models and hypotheses have been put forward to explain financial crises.' Among these, and of particular relevance to the South Korean situation, are the crisis zone model (Cole and Kehoe 1996) and the moral hazard argument (Krugman 1998). The basic mechanism of the crisis zone model is that a self-fulfilling debt crisis occurs if the initial level of government debt is above some critical level, and a random variable not connected to the fundamentals of the model is below another critical level. A crucial feature of the model is the ability of the government to roll over old debt into new under different debt maturity scenarios without losing the confidence of international bankers. If this is the case, an optimal management of the composition of debt is highly dependent on the average length of maturity of government debt. Another implication of the model is that the absence of prudential regulation while an economy is liberalizing its capital markets will hinder optimal foreign debt management. …

Dynamic Inconsistency and Exchange-Rate Target Zones: A Welfare Analysis

This paper examines the welfare implications of different exchange-rate systems, especially an exchange-rate target-zone system, in a context of monetary policy making and dynamic inconsistency. It is shown that when there is uncertainty, there is a trade-off between commitment to a rule and discretion. A free-floating exchange-rate system may have the same loss function values in terms of price and output fluctuations as that of a target zone. However, a target-zone system may be more attractive since there is less exchange-rate fluctuation. Returning to a fixed-rate system may be worse since it may bring about larger welfare losses especially when supply shocks dominate. [F31, E52]