74th International Atlantic Economic Conference

October 04 - 07, 2012 | Montréal, Canada

Exchange rate regimes and financial stability

Saturday, October 6, 2012: 5:30 PM
Ovidiu Stoica, Ph.D. , Business Administration, Alexandru Ioan Cuza University of Iasi, Romania, Iasi, Romania
Iulian Ihnatov , "Alexandru Ioan Cuza" University of Iasi, Iasi, Romania
Financial stability became, in the framework of the financial crisis, a common topic for the central banks. Beside monetary stability, now the financial stability seems to be (again) one of the main preoccupations of the central banks. This is even more interesting taking into account the tendency during the last decade especially to create single national financial supervision authorities, outside the central banks.

The financial literature does not connect very often the financial stability with the exchange rate regime. More common connections for the financial stability are, of course, with the monetary stability and the monetary policy, but also with the competition in the financial system or with the financial innovation. Another easier connection is between the financial stability and the regulatory and supervisory framework; sometimes, financial stability is connected directly with some financial institutions, including with the hedge funds or the cooperative banks, or even with the corporate finance structure. However, little attention was paid directly for the analysis of the correlation between the exchange rate regime and the financial stability. The analysis of the exchange rate regimes itself is another topic very common in high level articles and journals. But, again, the connection between the two topics we propose is not so common. Barry Eichengreen (1988) focuses his paper on the implications of international monetary arrangements for the stability of the banking system. He emphasis that most of the literature on the choice of exchange rate regime pays little mind to implications for financial stability and the situation is not much different after more than two decades. In another famous paper, McKinnon (1988) analysis the implications of the monetary and exchange rates policies on the financial stability, but at international level. Aizenman and Hausmann (2000) shows that the choice of an exchange rate regime is intertwined with the financial structure. Domaç and Martinez Peria (2000) highlights again that, with the exception of the works of Eichengreen, the connection between exchange rates regimes and financial stability remains largely unexplored at the empirical level. Both studies focuses on bank crisis and analyze the role of external factors (foreign interest rates and OECD growth), respectively exchange rate regime, financial liberalization, and deposit insurance.

We use in our study, like Domaç, and Martinez Peria (2000), both IMF de jure and de facto exchange rate classifications, but in order to analyze the impact of the exchange rate regimes we introduce also the financial supervision type (sectorial authority, single authority, twin peaks). The second development is connected to the extension of the study not only in order to examine the stability of banks (i.e. banking crisis), but also including the stock markets evolution/stability, for this measuring the financial markets stress.

We expect to find some correlations between the exchange rate regime (type and stability in time) and the financial stability as well as the financial supervisory system’s role.