Risk and Asian Exchange Rate Regimes

13 Pages Posted: 16 Mar 2005

See all articles by Ashima Goyal

Ashima Goyal

Indira Gandhi Institute of Development Research (IGIDR)

Ankita Agarwal

Indira Gandhi Institute of Development Research (IGIDR) - Development Research

Date Written: March 2005

Abstract

A panel regression gives evidence that more flexibility in Asian exchange rates reduces risk associated with bank borrowing abroad, but deviations from mean exchange rates, and from the renminbi, increase risk. Since the exchange rate regime affects bank behavior and the incentives to hedge, the results broadly support the bank run over the moral hazard view of twin banking and currency crisis. The results suggest that flexibility in exchange rates is required for Asian EMEs, but the flexibility has to be limited, and it depends on more flexibility in the renminbi. This has implications for current global imbalances in reserves and feasible adjustment paths.

Keywords: exchange rate flexibility, risk, hedging, moral hazard, bank runs

JEL Classification: F0, F3, F31

Suggested Citation

Goyal, Ashima and Agarwal, Ankita, Risk and Asian Exchange Rate Regimes (March 2005). Available at SSRN: https://ssrn.com/abstract=662663 or http://dx.doi.org/10.2139/ssrn.662663

Ashima Goyal (Contact Author)

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Bombay 400065, Maharashtra
India
+91 22 28400920 (Phone)
+91 22 28402752 (Fax)

HOME PAGE: http://www.igidr.ac.in/~ashima

Ankita Agarwal

Indira Gandhi Institute of Development Research (IGIDR) - Development Research

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065
India

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