Section prepared by Nathan Porter (SPR).
The exchange rate regime classification is based on the Fund’s AREAER, with the top two categories described as “flexible.”
Section prepared by Jun Il Kim (RES).
Other crisis indicators are also explored including those identified in the VEE or based on the exchange market pressure, but tend to yield often insensible results for the crisis period perhaps for reasons relates to the use of annual data. Specifically, net capital flows in annual frequency are only weakly correlated with those crisis indicators which are constructed based on the data in quarterly or higher frequency.
Section prepared by Manuela Goretti and Ferhan Salman (SPR).
Section prepared by Era Dabla-Norris (SPR), Jun Il Kim (RES), and Kazuko Shirono (SPR).
Ignoring possible correlation among shocks could lead to an under- or over-estimation of optimal reserves depending on the sign of correlation: if shocks were positively (negatively) correlated, calibration exercise that assumes uncorrelated shocks would yield lower (higher) optimal reserves. Assuming a specific set of shock values is even more restrictive as shocks tend to be non-stochastic in nature.
Further disaggregation of country groups, albeit desirable in light of significant heterogeneity across LICs, is not considered since the number of countries is highly uneven across country groups, often with too few countries in a certain group to yield statistically meaningful results.
Since a large shock event is defined as a union of six individual shock events (defined as the event at or below the 10th percentile of the country-specific sample distribution), the unconditional probability q should be close 0.6 if individual shocks are uncorrelated. The sample estimate of 0.5 thus suggests that individual shocks are positively (albeit weakly) correlated in the sample. However, it should be noted that since the benefit of holding reserves is increasing in q, optimal reserves are also increasing in q.
Section prepared by Joonkyu Park (MCM).
In August 2010, the long-term borrowing requirement ratio was further revised up to 100 percent and the cap on forward foreign exchange contracts was further reduced to 100 percent.
The limit for domestic banks was set at 50 percent of capital in the previous month; while the limit for foreign bank branches was set at 250 percent of capital in the previous month.
FX derivatives trading between banks and enterprises, shipbuilders or asset management companies, led to the increase in short-term overseas borrowing, which was one of the main factors behind the surge in short-term external debt in 2006~2007. About half of the increase in total external debt of US$172 billion in the same period is credited to the increase in FX forward purchases by banks from exporters, especially shipbuilders.
Some investors raised issue of inconsistency of policy measures, pointing out the fact that the government abolished withholding tax in May 2009.
Foreign investors can dispose their positions in longer-term bonds in the secondary market. However, long-term investors, especially those with long-term liability such as pension funds and insurance companies tend to have less incentive to dispose their long-term asset positions, mainly due to more concerns on price risks and mismatch in asset-liability management (ALM).