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Article
Publication date: 6 November 2017

Levan Efremidze, Sungsoo Kim, Ozan Sula and Thomas D. Willett

This paper aims to investigate the relationship between capital flow surges, reversals and sudden stops.

Abstract

Purpose

This paper aims to investigate the relationship between capital flow surges, reversals and sudden stops.

Design/methodology/approach

Emphasizing the importance of looking at the behavior of domestic as well as foreign capital flows, the authors distinguish sudden stops from capital flow reversals by attributing the former to foreign capital flows only.

Findings

It is found that, despite the large differences in the number of surges identified by several different measures in the literature, a majority of surges do end in reversals of some type. The percentages tend to be slightly over half for surges in net capital flows, but on average, 70 per cent of gross surges end in sudden stops. Furthermore, contrary to popular belief, approximately half of sudden stops and net capital flow reversals are not preceded by surges. It is also found that surges that persist longer are more likely to turn into sudden stops and reversals.

Research limitations/implications

The authors find substantial empirical differences in the characteristics of sudden stops (based on gross foreign flows) and reversals (based on net flows).

Practical implications

Large inflows of financial capital are not always a strong indicator that a country’s economic policies will continue to provide stability in the future. They may signal an increase rather than reduction in the risk of future instability.

Originality/value

This study focuses on an issue that has been less explored to date, the relationship between capital flow surges, reversals and sudden stops. The authors distinguish, redefine and document differences among capital flow reversals and sudden stops. Duration of surges is related to the likelihood of having reversals and sudden stops.

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Article
Publication date: 8 November 2011

Thomas Willett, Eric M.P. Chiu, Sirathorn (B.J.) Dechsakulthorn, Ramya Ghosh, Bernard Kibesse, Kenneth Kim, Jeff (Yongbok) Kim and Alice Ouyang

There has been significant interest in the classification of exchange rate regimes in order to investigate a wide range of hypotheses. Studies of the effects of exchange…

Abstract

Purpose

There has been significant interest in the classification of exchange rate regimes in order to investigate a wide range of hypotheses. Studies of the effects of exchange rate regimes on crises and other aspects of economic performance can have important implications for policy choices. The paper provides a guide to the major new large data sets that classify exchange rate regimes and to critically analyze important methodological issues.

Design/methodology/approach

The study surveys and critiques the literature and provides theoretical analysis of major issues involved in classifying exchange rate regimes.

Findings

The study finds that all of the new data sets have problems but some have more problems than others and several of them are substantial improvements on what was previously available. It is also shown that the best ways to classify depend on the issue being addressed and that for detailed studies variants of measures using the concept of exchange market pressure are the most promising. Directions for future research are also discussed.

Originality/value

The paper makes researchers aware of the new data sets that are available and discusses their strengths and weaknesses. It also presents original analysis of several of the major conceptual issues involved in classifying exchange rate regimes.

Details

Journal of Financial Economic Policy, vol. 3 no. 4
Type: Research Article
ISSN: 1757-6385

Keywords

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Article
Publication date: 7 August 2017

Puspa Amri, Eric M.P. Chiu, Greg Richey and Thomas D. Willett

The purpose of this paper is to test whether financial crises themselves provide some degree of ex post discipline. In other words, is there learning from the mistakes…

Abstract

Purpose

The purpose of this paper is to test whether financial crises themselves provide some degree of ex post discipline. In other words, is there learning from the mistakes associated with crises? The authors test this hypothesis on credit growth, a frequent contributor to banking crises.

Design/methodology/approach

The study uses statistical tests (comparison of means) on a sample of 72 banking crises, the onset of which occurred between 1980 and 2008. Tests for significance of the difference are conducted using Kolmogorov–Smirnov equality in distribution tests.

Findings

The results show that real credit growth fell substantially (relative to average) by about 8 per cent points from pre- to post-crisis periods, and that average banking regulation and supervision strengthens after a crisis.

Originality/value

This paper provides empirical support for the proposition that while financial markets may fail to give sufficient warning signals before a financial crisis, they may discipline governments to undertake reforms in the aftermath of a crisis.

Details

Journal of Financial Economic Policy, vol. 9 no. 3
Type: Research Article
ISSN: 1757-6385

Keywords

Content available
Article
Publication date: 1 April 2014

Thomas D. Willett

Content available
Article
Publication date: 8 November 2011

Thomas D. Willett

Abstract

Details

Journal of Financial Economic Policy, vol. 3 no. 4
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 25 May 2012

Linyue Li, Nan Zhang and Thomas D. Willett

Study of the interdependence among economies is of considerable importance. This area includes issues such as the increasing importance of regional economic interactions…

Abstract

Purpose

Study of the interdependence among economies is of considerable importance. This area includes issues such as the increasing importance of regional economic interactions, the effects of economic growth and recession in the advanced economies on emerging market countries, and financial contagion. A wide range of related terms and methodologies are used in the literature of interdependence. The purpose of this paper is to review the major concepts and various measurements of interdependence in financial markets and the real economy, serving as a reference and benchmark for future research on interdependence among specific regional or global economies.

Design/methodology/approach

Major measurements of interdependence are reviewed from simple approach to more complicated ones, and strengths and weaknesses of the various measurements of interdependence are discussed.

Findings

This paper surveys the various major measurements of interdependence and illustrates how they have been used to address a substantial range of issues.

Originality/value

The paper shows that studies of macroeconomic and financial interdependence use the same types of econometric measurements. The review and critiques of these various types of measures should be of value to those wishing to do research in these areas and also to those wishing to have a better understanding of papers that they read.

Details

Journal of Financial Economic Policy, vol. 4 no. 2
Type: Research Article
ISSN: 1757-6385

Keywords

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Article
Publication date: 6 April 2012

William R. Clark, Mark Hallerberg, Manfred Keil and Thomas D. Willett

The purpose of this paper is to review concepts and measurements related to financial globalization such as financial openness, financial integration, monetary…

Abstract

Purpose

The purpose of this paper is to review concepts and measurements related to financial globalization such as financial openness, financial integration, monetary interdependence, and the mobility and movement of capital.

Design/methodology/approach

This paper surveys the theoretical and empirical literature on monetary interdependence and financial globalization. The major ways in which these concepts are measured empirically are presented and critiqued.

Findings

Disagreements about the degree of financial integration and capital mobility are, in part, explained by the different approaches to measuring these concepts. One major challenge in obtaining a good measures is controlling for other major factors that may influence observed correlations among financial variables. While these relationships still cannot be estimated precisely, it can be safely said that while high for many countries, few if any financial markets are perfectly integrated across countries.

Originality/value

By offering a comprehensive analysis of these different measurements, the paper underscores the different implications for national policies and the operation of the international monetary system of different dimensions of globalization. In particular, the proposition that financial globalization has left most countries with little autonomy for domestic monetary policy is subject to serious debate, at least in the short run.

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Article
Publication date: 8 November 2011

Richard C.K. Burdekin, King Banaian, Mark Hallerberg and Pierre L. Siklos

The latest generation of research into macroeconomic policy has turned from more technical aspects of optimal control and expectations formation to consideration of the…

Abstract

Purpose

The latest generation of research into macroeconomic policy has turned from more technical aspects of optimal control and expectations formation to consideration of the policymaking institutions themselves. More and more countries have moved towards greater degrees of central bank independence, including many developing economies as well the member countries of the European Central Bank. What still is not generally settled among economists is how to measure the stance of policy and the institutional features of the policymaking process. The purpose of this paper is to assess prevailing monetary and fiscal policies.

Design/methodology/approach

The paper takes the form of a review encompassing many different measurements of policy stance and policymaking processes. The authors begin with monetary policy followed by an analysis of central bank institutions. The next sections turn to fiscal policy and the need to adjust budget balance for the state of the business cycle. There is then a brief concluding section.

Findings

The authors show in this review that fiscal and monetary rules, and economists' understanding of them, have changed substantially over the years. While on one level there is greater consensus, there have been new questions raised in the process that leave plenty of room for further ongoing research in these key policy areas as well as the optimal design of the design of the monetary and fiscal institutions concerned.

Originality/value

The paper provides a review of the existing literature updated and applied with reference to recent events, including the global financial crisis.

Details

Journal of Financial Economic Policy, vol. 3 no. 4
Type: Research Article
ISSN: 1757-6385

Keywords

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Book part
Publication date: 8 March 2011

Thomas D. Willett, Priscilla Liang and Nan Zhang

This chapter argues that there are a number of different versions of decoupling hypotheses and that rapid swings in their popularity are due largely to herding in popular…

Abstract

This chapter argues that there are a number of different versions of decoupling hypotheses and that rapid swings in their popularity are due largely to herding in popular mental models and shifts in short-run correlations. It is important to not put too much emphasis on such changes of correlations since these can vary substantially depending on the patterns of shocks. There are substantial differences in the effects of contagion during the current crisis on growth rates of both advanced and emerging economies, including Brazil, Russia, India, and China (the BRICs). Our estimates suggest that while countries like China and India have been able to maintain high growth rates, their short falls from trends have not been greatly smaller than for the United States itself. Thus, their decoupling has not been as great as many popular analyses have suggested.

Details

The Evolving Role of Asia in Global Finance
Type: Book
ISBN: 978-0-85724-745-2

Keywords

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Article
Publication date: 6 April 2012

Thomas D. Willett

The purpose of this paper is to stress the role that several defective theories or views of the world played in generating the subprime financial crisis.

Abstract

Purpose

The purpose of this paper is to stress the role that several defective theories or views of the world played in generating the subprime financial crisis.

Design/methodology/approach

This is done by describing these views, showing that they were widely held by relevant decision makers, and by analyzing the flaws in these views. A considerable amount of literature is surveyed in the process.

Findings

It was found that these defective views did play a major role in generating the crisis.

Research limitations/implications

Implications of the analysis for future research are discussed.

Practical implications

Implications of the analysis for reform of private and public sector financial policies are discussed.

Originality/value

While most of the arguments in the paper are not new, no paper of which the author is aware pulls them together with the same emphasis on how faulty mental models interacted with dangerous incentive structures to play a prime role in generating the crisis. The paper also references a much wider range of literature on the crisis than any study of which the author is aware. The paper should be of value to any one interested in the causes of the crisis and ways to make future crises less likely.

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