Michael M. Hutchison

• PhD
• Professor at University of California, Santa Cruz

This paper investigates the price response to credit rating agency (CRA) announcements on sovereign bonds. We characterize credit rating events controlling announcements for the prior credit state – outlook, watch/review, or stable status as well as the level of the credit rating. Emphasizing the transition from one state to another allows us to di...

We investigate how European policy initiatives influenced market assessments of sovereign default risk and banking sector fragility during the sovereign debt crisis in four adversely affected countries-Portugal, Ireland, Spain and Italy. We focus on three broad groups of policies: (a) ECB policy actions (monetary and financial support), (b) EU prog...

Procyclicality of fiscal policy is a common feature in developing economies, by contrast with advanced economies, and leads to greater business-cycle amplitudes. We investigate potential causes of fiscal procyclicality in developing economies, including specific types of fiscal rules, low government efficiency, participation in IMF programs, large...

We investigate how European policy initiatives influenced market assessments of sovereign default risk and banking sector fragility during the sovereign debt crisis in four adversely affected countries — Portugal, Ireland, Spain and Italy. We focus on three broad groups of policies: (a) ECB policy actions (monetary and financial support), (b) EU pr...

We assess the marginal information value of credit rating announcements on market pricing of sovereign risk as measured by CDS spreads. We demonstrate that accurate assessment of the effect of credit rating changes must be conditioned on relevant information known prior to the rating change. To this end, we include macroeconomic conditions and the...

This paper evaluates developments in India’s nominal and real exchange rates over the past two decades, describing longer term trends as well as short-term movements and volatility. In addition, we evaluate the motivation and impact of exchange rate policy in India, including its interaction with domestic monetary policy. We find substantial diverg...

New indices of fiscal rule strength are constructed and, using a dynamic panel econometric model for 27 EU countries over the period 1990–2012, we assess whether national fiscal rules alone help to promote sustainable public finances in the EU or whether they must be supported by good governance in order to be effective. We find that fiscal rules a...

We investigate whether fiscal rules help to reduce the extent of policy procyclicality—how government expenditure policy responds to GDP-- in a dynamic panel framework with 81 advanced, emerging and developing countries over 1985-2012. We construct two new fiscal rule indices and investigate whether rules help to dampen procyclical policies. We con...

This paper evaluates the impact of tapering “news” announcements by Fed senior policy makers on financial markets in emerging economies. We apply a panel framework using daily data, and find that emerging market asset prices respond most to statements by Fed Chairman Bernanke, and much less to other Fed officials. We group emerging markets into tho...

This paper evaluates the impact of tapering “news” announcements by Federal Reserve senior policymakers on financial markets in emerging economies. We apply a panel framework using daily data, and find that emerging-market asset prices respond most to statements by Federal Reserve Chairman Bernanke, and much less to other Federal Reserve officials....

This paper presents empirical evidence on asset market linkages between China and Asia and how these linkages have shifted during and after the global financial crisis of 2008–2009. We find only weak cross-country linkages in longer-term interest rates, but much stronger linkages in equity markets. This finding is consistent with the greater develo...

This paper investigates the impact of credit rating changes on the sovereign spreads in the European Union and investigates the macro and financial factors that account for the time varying effects of a given credit rating change. We find that changes of ratings are informative, economically important and highly statistically significant in panel m...

This paper examines the effectiveness of international capital controls in India over time by analyzing daily return differentials in the non-deliverable forward (NDF) markets using the self-exciting threshold autoregressive (SETAR) methodology. We begin with a detailed narrative on the evolution of capital controls in India and calculate deviation...

The past two decades have witnessed a worldwide move by emerging markets to adopt explicit or implicit inflation targeting regimes. A notable and often discussed exception to this trend, of course, is China which follows pegged exchange rate regime supported by capital controls. Another major exception is India. It is not clear how to characterize...

Widespread liberalization in the 1980s and 1990s enabled the freer movement of capital across international borders. Alongside large and often volatile movements in capital flows, risks to macro stability and the health of the financial system have led many countries to reconsider the wisdom of continuing to allow unimpeded flows of capital. Asia’s...

Restrictions on international capital transactions and other payments are usually designed to limit volatile short-term capital flows (“hot money”) and stabilize the exchange rate. Their imposition, however, may have the opposite effect by inadvertently signaling the continuation of macroeconomic imbalances and inconsistent (“bad”) future policy (B...

A key challenge for macroeconomic policy in open economies is how to simultaneously manage exchange rates, interest rates and capital account openness – the trilemma. This study calculates a trilemma index for India and investigates its evolution over time. We find that financial integration has increased markedly after the mid-2000s, with correspo...

Can official news and policy announcements affect foreign exchange speculation? This paper investigates the impact of macroeconomic surprises on risk perceptions of carry traders and the size of their overall positions. Unlike much of the previous literature, we are able to identify a significant impact of macroeconomic surprises on foreign exchang...

Rim Research Program, the International Centre for the Study of East Asian Development, and the UCSC Committee on Research and Division of Social Sciences for financial support. We are grateful to Rita Madarassy for her help in the data collection and preliminary analysis phase of this project, and to Eileen Mauskopf for helpful comments on an earl...

We estimate the pricing of sovereign risk for fifty countries based on fiscal space (debt/tax; deficits/tax) and other economic fundamentals over 2005-10. We focus in particular on five countries in the South-West Eurozone Periphery, Greece, Ireland, Italy, Portugal and Spain. Dynamic panel estimates show that fiscal space and other macroeconomic f...

A currency crisis is a speculative attack on the foreign exchange value of a currency, resulting in a sharp depreciation or forcing the authorities to sell foreign exchange reserves and raise domestic interest rates to defend the currency. This article discusses analytical models of the causes of currency and associated crises, presents basic measu...

This chapter examines how market data can be used to infer the impact of capital controls using data from India. Estimations for different sub-periods are used to infer the evolving impact of controls that have changed over time in a complex and piecemeal manner. We use deviations from covered interest parity utilizing data from one-month and three...

Summary We investigate inflation targeting (IT) in emerging markets, focusing on the role of the real exchange rate and the distinction between commodity and non-commodity exporters. IT emerging markets appear to follow a "mixed strategy" whereby both inflation and real exchange rates are important determinants of policy interest rates. The respons...

This article investigates the effects of monetary and fiscal policies on output growth during sudden-stop balance of payments crisis in emerging markets and developing countries. Sudden stops in capital flows, and subsequent deep recessions, are a frequent occurrence in these countries but there is no professional consensus, and little systematic e...

We investigate whether the seemingly discretionary and flexible approach of India’s central bank, the Reserve Bank of India (RBI), can in practice be described by a Taylor-type rule. We estimate an exchange rate-augmented Taylor rule for India over the period 1980Q1 to 2008Q4, allowing for potential structural shifts between the pre- and post-liber...

This paper evaluates how the global financial crisis emanating from the U.S. was transmitted to emerging markets. Our focus is on the extent that the crisis caused external market pressures (EMP), and whether the absorption of the shock was mainly through exchange rate depreciation or the loss of international reserves. Controlling for variety of f...

The Expansionary Fiscal Contraction (EFC) hypothesis predicts that a major fiscal consolidation leads to an economic expansion under certain circumstances. We test this hypothesis, and the implied non-linear responses of the economy to large and small changes in fiscal policy, using data from the 1983 Danish fiscal reform. We use a structural VAR/e...

We investigate the effectiveness of capital controls in insulating economies from currency crises, focusing in particular on both direct and indirect effects of capital controls and how these relationships may have changed over time in response to global financial liberalization and the greater mobility of international capital. We predict the like...

The impact of news surprises on exchange rates depends in principle upon a number of factors including the state of the economy, institutional setting and nature of the expected policy response. These characteristics may lead to state-contingent asymmetric responses to news. In this paper we investigate the possible asymmetric response of intraday...

We find that emerging markets appeared to be somewhat insulated from developments in U.S. financial markets from early 2007 to summer 2008. From that point on, however, emerging markets responded very strongly to the deteriorating situation in the U.S. financial system and real economy. Our regression "event study," focusing on 15 types of news, in...

How effective are capital account restrictions? We provide new answers based on a novel panel data set of capital controls, disaggregated by asset class and by inflows/outflows, covering 74 countries during 1995-2005. We find the estimated effects of capital controls to vary markedly across the types of capital controls, both by asset categories, b...

The Indian government has taken a number of incremental measures to liberalize legal and administrative impediments to international capital movements in recent years. This paper analyzes the extent to which the effectiveness of capital controls in India, measured by the domestic less net foreign interest rate differential (deviations from covered...

We investigate the effectiveness of capital controls in insulating economies from currency crises and capital flow contractions, focusing in particular on how these relationships may have changed over time in response to global financial changes and the development of domestic and off-shore financial markets. We predict the likelihood of currency c...

In recent years China has faced an increasing trilemma--how to pursue an independent domestic monetary policy and limit exchange rate flexibility, while at the same time facing large and growing international capital flows. This paper analyzes the impact of the trilemma on China's monetary policy as the country liberalizes its good and financial ma...

Estimating the effect of official foreign exchange market intervention is complicated by the fact that intervention at any point entails a “self-selection” choice made by the authorities and that no counterfactual is observed. To address these issues, we estimate the “counterfactual” exchange rate movement in the absence of intervention by introduc...

Estimating the effect of official foreign exchange market intervention is complicated by the fact that intervention at any point entails a self-selection choice made by the authorities and that no counterfactual is observed. To address these issues, we estimate the counterfactual exchange rate movement in the absence of intervention by introducing...

We investigate the effects of both U.S. and Japanese news surprises, measured as the difference between macroeconomic announcements and preceding survey expectations, on the intraday JPY/USD exchange rate. No previous study has considered the intraday JPY/USD exchange rate responses to a broad set of comparable news surprises from both the U.S. and...

Experts on the Japanese economy examine Japan's prolonged period of economic underperformance, analyzing the ways in which the financial system, monetary policy, and international financial factors contributed to its onset and duration. After experiencing spectacular economic growth and industrial development for much of the postwar era, Japan plun...

Are countries with unregulated capital flows more vulnerable to currency crises? Efforts to answer this question properly must control for self-selection bias, because countries with liberalized capital accounts may also have sounder economic policies and institutions that make them less likely to experience crises. We employ a matching and propens...

This paper investigates the effectiveness of intervention in the JPY/USD exchange rate market using recently published official daily data on Bank of Japan intervention and an event study methodology. We identify separate intervention “episodes” and analyze the subsequent effect on the exchange rate. Using the non-parametric sign test and matched-s...

economy. The seemingly unstoppable Japanese economy fell abruptly into re- cession in the early 1990s, beginning a period of either recession or weak economic activity, commodity and asset price deflation, banking failures, increased bankruptcies, and rising unemployment. This has been termed the ''great recession'' (Knutter and Posen 2001) or ''lo...

We investigate the output effects of banking and currency crises in emerging markets, focusing on whether "twin crises" entail especially large losses. Recent literature emphasizes the costs of financial crises, and suggests that twin crises are particularly damaging to the real economy. Using a panel data set for 1975-97, we find that currency (ba...

How does the management and resolution of the current crisis compare with the response of the Nordic countries in the early 1990s, widely regarded as exemplary? We argue that, while intervention has been prompter, the measures taken so far remain less comprehensive and in-depth. In particular, the cleansing of balance sheets has proceeded more slow...

This article examines the rationale behind the massive increase in Japanese foreign exchange market intervention operations in 2003-04, and evaluates its effectiveness both in limiting yen exchange rate appreciation and influencing the direction of monetary policy. The two main questions addressed in this study are: Was the intervention effective i...

INTRODUCTION On February 13, 2002, Japanese Prime Minister Koizumi directed ministries to formulate emergency countermeasures to deflation , stating, in a press release that “while deflation has a varied background, the resolution of the immediate financial problems is indispensable to overcoming deflation” (italics added). Koizumi linked deflation...

Sudden stops are the simultaneous occurrence of a currency/balance of payments crisis with a reversal in capital flows. We investigate whether sudden-stop crises are a unique phenomenon and whether they entail an especially large and abrupt pattern of output collapse (a “Mexican wave”). Using a panel data set over 1975–1997 and covering 24 emerging...

Are countries with unregulated capital flows more vulnerable to currency crises? Efforts to answer this question properly must control for “self selection†bias since countries with liberalized capital accounts may also have more sound economic policies and institutions that make them less likely to experience crises. We employ a matching and pr...

Foreign Direct Investment (FDI) has contributed in a big way in improving export competitiveness This paper examines the interaction between international national stock markets using daily data and a VAR model. The results indicate that the speed of adjustment to equilibrium after a shock is about two days, indicating that markets are highly effic...

Questions over the role of the IMF in the economic development and adjustment in developing countries have been the topic of intensive research and debate in recent years. Although most studies find that participation in an IMF program helps facilitate balance of payments adjustment, research in this area almost uniformly finds that growth is reduc...

We investigate the effects of IMF stabilization programs, and the reasons behind the unusually high IMF activity and relatively low program completion rates in Latin America. We base our tests on a panel, and distinguish between IMF program approvals and completion. We find that Latin America has higher output costs of IMF programs (especially when...

Recent evidence based on event studies demonstrates the short-run effectiveness of sterilized (non-monetary) intervention to stabilize exchange rates. This role is especially important for developing economies where currency volatility is frequently tied to unstable market expectations, herding behaviour and contagion, rather than ‘fundamental’ mac...

This study provides evidence supporting the effectiveness of sterilised foreign exchange market intervention by central banks using an event study approach. An event study framework is better suited to the study of sporadic and intense periods of official intervention, juxtaposed with continuously changing exchange rates, than standard time-series...

Japanese official intervention in the foreign exchange market is of by far the largest magnitude in the world, despite little or no evidence that it is effective in moving exchange rates. Up until recently, however, official data on intervention has not been available for Japan. This paper investigates the effectiveness of intervention using recent...

Sudden Stops are the simultaneous occurrence of a currency/balance of payments crisis with a reversal in capital flows (Calvo, 1998). We investigate the output effects of financial crises in emerging markets, focusing on whether sudden-stop crises are a unique phenomenon and whether they entail an especially large and abrupt pattern of output colla...

Japanese official intervention in the foreign exchange market is of by far the largest magnitude in the world, despite little or no evidence that it is effective in moving exchange rates. Up until recently, however, official data on intervention has not been available for Japan. This paper investigates the effectiveness of intervention using recent...

We investigate the output effects of severe banking and currency crises in emerging markets, focusing on whether “twin crises” (simultaneous occurrence of currency and banking crises) exist as a unique phenomenon and whether they entail especially large losses. Recent literature, mostly relating to the East Asian crisis, emphasizes the interplay an...

Sudden Stops are the simultaneous occurrence of a currency/balance of payments crisis with a reversal in capital flows (Calvo, 1998). We investigate the output effects of financial crises in emerging markets, focusing on whether sudden-stop crises are a unique phenomenon and whether they entail an especially large and abrupt pattern of output colla...

Using a unique intervention “news†data set, this paper investigates the impact of ECB intervention and intervention-related news (newswire reports) on the Euro exchange rate. A time-series study of news generated by ECB officials and market participants regarding intervention and the value of the Euro as well as an event study of firm reports o...

We investigate the output effects of severe currency crises in emerging markets. Using a panel data set over the 1975-97 period and covering 24 emerging-market economies, we find that currency and balance of payments crises—even after controlling for other factors—reduce output by about 5-8 percent over a two-three year period. This adverse effect...

Central banks actively engage in sterilized foreign exchange market intervention despite numerous empirical studies indicating that these operations do not systematically affect the exchange rate. Are these policies misguided and central bankers irrational? Or is evidence showing the effectiveness of sterilized intervention being overlooked? This p...

This paper investigates the output effects of IMF-supported stabilization programs, especially those introduced at the time of a severe balance of payments/currency crisis. Using a panel data set over the 1975-97 period and covering 67 developing and emerging-market economies (with 461 IMF stabilization programs and 160 currency crises), we find th...

This book analyzes how the bank-dominated financial system—a key element of the oft-heralded "Japanese economic model"—broke down in the 1990s and spawned sweeping reforms. Japan's financial institutions and policy underwent remarkable change in the past decade. The country began the 1990s with a heavily regulated financial system managed by an unc...

Finland was the only Nordic country to join the European Monetary Union (EMU) when it began on January 1, 1999. In the autumn of 1994, the voters of Sweden and Finland decided to join the European Union (EU), while those in Norway decided to remain outside. In Denmark, the voters had earlier decided not to join the single currency area but othewise...

We investigate the output effects of severe currency crises in emerging markets. Using a panel data set over the 1975-97 period and covering 24 emerging-market economies, we find that currency and balance of payments crises?even after controlling for other factors?reduce output by about 5-8 percent over a two-three year period. This adverse effect...

We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 fi...

A large literature on the appropriate sequencing of financial liberalization suggests that removing capital controls prematurely may contribute to currency instability. This paper investigates whether legal restrictions on international capital flows are associated with greater currency stability. We employ a comprehensive panel data set of 69 deve...

In this paper we argue that more complete modeling of foreign exchange intervention and sterilization dynamics is necessary when there are adjustment costs to changing private portfolios and/or the central bank attempts to balance longer-run monetary control against short-term exchange rate objectives. We show that measured correlations between dom...