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Joaquín Pi Universidad Complutense Madrid ABURRIDO? JUEGA GRATIS EN LA RED
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Definition of fear of floating A free floating exchange rate increases foreign exchange volatility. This may cause serious problems especially in emerging economies. These economies have a financial sector with one or more of following conditions:
When liabilities are in denominated in foreign currencies while assets are in the local currency, unexpected depreciations of the exchange rate deteriorate bank and corporate balance sheets and threaten the stability of the domestic financial system. For this reason emerging countries appear to face greater fear of floating, as they have much smaller variations of the nominal exchange rate, yet face bigger shocks and interest rate and reserve movements (Calvo and Reinhart, 2002). This is the consequence of frequen free floating countries reaction to exchange rate movements with monetary policy and/or intervention in the foreign exchange market. According to data from Levy-Yeyati and Sturzenegger (2004), the number of countries that present fear of floating increased significantly during the nineties. Calvo, G., and Reinhart, C. (2002). "Fear
of Floating." Quarterly Journal of Economics,
177: 379-408. Fear of floating in Asian countries Whereas intervention to support a currency often fails, intervention to push one down can be more effective, because in theory a central bank can print unlimited amounts of its own currency with which to buy dollars. As a result of central banks' heavy buying, Asia's foreign-exchange reserves have swollen from less than $800 billion at the start of 1999 to over $1.5 trillion now, almost two-thirds of the global total. Japan bought over $30 billion-worth in May alone; it now has almost $550 billion in its coffers. The world's seven biggest holders of foreign-exchange reserves are all in Asia (see chart).
The Asian countries' reluctance to allow their currencies to rise against the dollar is coming in for increasing criticism. At a meeting in Bali last weekend of Asian and European finance ministers, the Europeans urged the Asians to let their currencies rise. John Snow, America's treasury secretary, the International Monetary Fund and the Bank for International Settlements have all called for a stronger yuan. Asian governments worry that appreciating
currencies might hurt their exports. Yet many of their currencies are
supercompetitive. As the dollar slides, their trade-weighted values
against a basket of currencies is falling. According to The Economist's
Big Mac index, China has the most undervalued currency in the world. Using
more sophisticated methods, UBS, a Swiss bank,
reckons that the yuan is now more than 20% undervalued against the dollar. Fear of floating and overvaluation of chinese yuan But Japan is not the only
one trying to resist market forces. The Chinese yuan, the Malaysia It is hard to judge the
correct value for the Chinese yuan, but there are tell-tale signs that it
is undervalued. One is China's rapidly rising reserves; another is its
large surplus on its “basic balance”—the sum of its current-account
surplus and the net inflows of long-term capital, such as foreign direct
investment. Its basic balance currently stands at around 4% of GDP.
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n ringgit
and the Hong Kong dollar are all pegged to the greenback. Other Asian
currencies officially float, but their central banks have also been
intervening heavily to hold them down. The total reserves of the big
four—China, Japan, South Korea and Taiwan—have more than doubled over the
past three years (see chart 2), to $1.5 trillion, most of it held in
American government securities.