Emerging countries that have defaulted on their debt repayment obligations
in the past are more likely to default again in the future than are
non-defaulters with the same debt-to-GDP ratio. This paper explains this
stylized fact within a dynamic stochastic general equilibrium
framework that explicitly models renegotiations between a defaulting country
and its creditors. Quantitative analysis of the model reveals
that the equilibrium probability of default for a givendebt-to-GDP level
is weakly increasing with the number of past defaults, consistent
with empirical observations. The equilibrium of the model also accords
with an additional observed trend: a country for which default terms
require less than a 100 percent recovery rate tends to pay a higher rate
of return (relative to a risk-free rate) on debt that isissued subsequently
than do defaulting countries that agree to a full recovery rate.
(2) "Currency Composition of External Debt" (forthcoming)
Emerging countries issue a small fraction of their external debt in their
local currency. Moreover, there is an empirical link between exchange rate
depreciation and default probability. This paper attempts to explore these
observations within a dynamic stochastic general equilibrium model
in which bond issuances in local and foreign currencies are explicitly
embedded, and the exchange rate and default risk are determined endogenously.
Our quantitative analysis shows that the equilibrium share of debt denominated in the local currency is smaller than that denominated in the foreign currency.
This is driven by the fact that risk-averse foreign investors prefer to lend in the foreign currency rather than the local currency in order to avoid
exchange rate risk. This can lead to a vicious circle whereby the borrowing
country's consequent high exposure to exchange rate risk increases
the risk of default, which in turn precipitates an exchange rate depreciation
and a further increase in default risk.
(3) "Quantifying Market Perception of Foreign Exchange Intervention"
September 2009
Joint with Romain Veyrune (IMF)
(currently under the review for working paper)
This paper proposes a new method to quantify the market expectation of
official actions in the foreign exchange market. Based on
the time-series properties of spot exchange rates, we assess the impact of events such as interventions or off-market transactions on
estimated exchange rate inertia using a rolling regression. Our empirical results are consistent with our hypothesis that anticipated and
transparent interventions such as "regular interventions" do not have a significant impact on market expectations, while unexpected
interventions categorized as "discretionary interventions" have
a impact on market expectations, except in the case of a liquid market.
(4) "Dynamic Effect of Change in Exchange Rate System -From the Fixed
Exchange Rate Regime to
the Basket-peg or Floating Regime" February 2009 (Submitted for publication) [Paper]
Joint with Naoyuki Yoshino and Sahoko Kaji (Keio University)
We attempt to compute dynamic effect of shifts of exchange rate system from the dollar-peg to the basket-peg or floating and
obtain transition paths for the shifts, based on a stochastic dynamic small open-economy model. We find that countries are better off
shifting to the basket-peg or floating regime than maintaining the dollar-peg regime, in the long-run perspective. Furthermore,
because of welfare costs associated with volatility in nominal interest rates, the longer transition period of adjustments, the more benefits
a country would gain from suddenly shifting to the basket-peg from the dollar-peg regime rather than with adjusting gradually. Finally,
focusing on sudden shift to target regimes, our numerical analysis using Thai data shows that countries will be better off shifting to
the basket-peg rather than floating.
(5) "How Can Foreign Exchange Interventions be Distinguished from Other Official
Transactions? "
August 2009
Joint with Alain Vandepeute and Romain Veyrune (IMF)
(currently under the review for working paper)
Foreign exchange interventions are an official action under much scrutiny from economists and market participants. Designing
an intervention policy or refraining from intervening is a strategic choice.
Economists need to ascertain this strategic choice so as to
facilitate their analysis of a country's macroeconomic policies,while market participants need to understand the monetary authorities'
intervention policy to help them decide how to deal with foreign exchange risk. This is part of the academic effort to classify foreign
exchange arrangements, in particular to distinguish free from "dirty floats." However, identifying intervention is not easy. There are
a number of reasons for carrying out official transactions on the foreign exchange market, and not all of them involve intention to influence
the exchange rate. This paper analyzes official transactions on a qualitative basis. It concludes that the key element is the authorities'
communication to the market and its ability to influence market participant expectations. In addition, the paper argues that the ways
in which the interventions are implemented constitutes the main signal
that would implicitly reveal to market participants
the authorities' intentions.
(6) "Choices of Optimal Monetary Policy Instruments under the Floating and the Basket-peg Regimes"
September 2009 (Submitted for publication) [Paper]
Joint with Naoyuki Yoshino, and Sahoko Kaji (Keio University)
This paper determines whether adopting the basket-peg rather than the floating
regime is optimal for emerging countries. Under the
basket-peg regime, there is a trade-off between practical usefulness and welfare losses associated with the movement of capital across countries.
We use a small open-economy model with micro foundations to provide a simple basket weight rule. Although this is sub-optimal,
we show it is practical and easy to implement. After calibration using
Singaporean and Thai data for the period 1997Q3-2006Q2
and comparison among the cumulative losses associated with policy instrument rules, we show that a commitment to the basket weight rule
is superior to other instrument rules under the floating regime for small
open economies like Singapore and Thailand.
(7) "Preemptive or Expost-default Debt Renegotiation" (in progress)
Joint with Christoph Trebesch
Some emerging countries choose to renegotiate with their creditors preemptively
before the default, while some decide to declare defaults on
debt obligations and renegotiate with the creditors later. This paper attempts to explain these observed evidences within a dynamic stochastic general
equilibrium model that explicitly embeds both preemptive and expost-default renegotiations between a defaulting country and foreign investors.
The quantitative exercise expects to indicate that the country's choice
of preemptive or expost-default renegotiation depends endogenously on
expected and realized income level, output cost associated with defaults and also the expected outcomes of two types of renegotiations.
(8) "Incidence of Export Tax Rebate in China" (in progress)
This paper considers the incidence of export tax rebate in an emerging economy like China which imports a large share of intermediate goods
from abroad and also exports a large share of final goods to foreign countries. We build a static two-country, two-sector general equilibrium model
under perfect capital mobility, in which home government imposes both import
tax on foreign intermediate goods and export tax on home final goods.
Our calibration results using Chinese and U.S. data show that much of the burden of import tax may concentrate in domestic labor, while that of export tax
may fall on both home labor and foreign labor. A rise in rebate rate increases incidence of both export and import tax on domestic labor on one hand,
and decreases incidence of export tax on foreign labor and total capital
on the other hand.
Copyright (C) 2009 Tamon Asonuma All Rights Reserved.