Flexible Exchange Rates as Shock Absorbers

Sebastian Edwards () and Eduardo Levy Yeyati ()

Business School Working Papers from Universidad Torcuato Di Tella

Abstract: This paper studies how institutional factors and systemic risks (driven by macroeconomic conditions) prevalent in emerging economies may impact market discipline among banks (traditionally understood as market responses to bank fundamentals). First, we discuss how certain institutional features of emerging economies (underdeveloped capital markets, pervasive government ownership of banks, greater guarantees, inadequate disclosure and transparency) may affect market responses to bank risk. Second, using the recent Argentine crisis as an illustration, we argue that systemic risks may exert an overwhelming impact on market behavior, overshadowing the link between the latter and bank fundamentals. Thus, market discipline, while missing in the traditional sense, may be indeed quite robust once systemic risks are factored in. We conclude that in emerging economies the analysis of market discipline should take into account the importance of institutional and systemic factors.

New Economics Papers: this item is included in nep-fmk, nep-ifn and nep-lam
Date: 2004
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Working Paper: Flexible Exchange Rates as Shock Absorbers (2003)
Journal Article: Flexible exchange rates as shock absorbers (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:udt:wpbsdt:exchangerates

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