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N° 2010-08 |
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| April 2010 |
| Exchange Rate Flexibility Across Financial Crises |
Virginie Coudert
Cécile Couharde
Valérie Mignon |
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| This paper studies the impact of global financial turmoil on the exchange rate policies in
emerging countries. Many emerging countries have loosened the link of their currencies to the
US dollar since the bursting of the subprime crisis in July 2007. Spillovers from advanced
financial markets to currencies in emerging countries stem from the same causes documented
in the literature on contagion, such as the drying–up of investors’ liquidity, the rise in risk
aversion, and the updating of their risk assessments. Consequently, interdependencies across
currencies are likely to be exacerbated during crisis periods. To test this hypothesis, we assess
the exchange rate policies by their degree of flexibility, itself proxied by the exchange rate
volatility, and investigate their relationship to a global financial stress indicator, measured by
the volatility on global markets. We introduce the possibility of non-linearities by running
smooth transition regressions (STR) over a sample of 21 emerging countries from January
1994 to September 2009. The results confirm that exchange rate flexibility does increase more
than proportionally with the global financial stress, for most countries in the sample. We also
evidence regional contagion effects spreading from one emerging currency to other currencies
in the neighboring area. |
Non-technical summary  |
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Résumé
non-technique
en français |
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| Full text |
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| Financial crises; dollar pegs; contagion effects; nonlinearity |
Keywords |
| F31; G15; C22 |
JEL classification |
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