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Story - antoq - 10/18/2010 - 13:46 - 155 comments - 0 attachments
Asian cities cannot finance the infrastructure investments they need without accessing private domestic savings. Urban growth has multiplied demand for investment in water systems, wastewater collection and treatment, roads, and other facilities. At the same time, decentralization strategies have shifted much of the responsibility for this investment to local governments. Private financing can be attracted to urban infrastructure in different ways including direct private investment in income earning facilities but perhaps the most critical avenue will be the local credit market. In a world of decentralized governance, domestic credit markets must be capable of generating long-term financing for cities and their infrastructure agencies.
Two models of municipal credit markets are considered here: (i) bank lending, which financed municipal investment in western Europe throughout most of the 20th century and is still the primary source of local credit financing there; and (ii) municipal bonds, which have been the foundation of municipal borrowing in North America. In designing local credit initiatives for Asia or other parts of the developing world, policy makers do not have to choose between these two systems, which are converging in their regions of origin. Countries now building or strengthening local credit markets would do well to select characteristics from both models and, even more, to encourage competition on a level playing field between bank lending and bond issuance.
According to the traditional theory, an exchange rate depreciation usually implies a real currency depreciation which increases the volume of exports. At least four conditions have to be verified for this effect to be observed: (1) The depreciation is not transmitted to domestic prices, (2) export prices are set in the exporter’s currency, (3) the foreign demand is sufficiently elastic (Marshall-Lerner condition), and (4) exporter’s supply is sufficiently elastic too.
This paper does not study the existence of those conditions, since previous studies have shown that they are likely to be observed. Nevertheless, several recent papers have underlined the non systematic character of the existence of J-Curve or competitiveness effect. Duttagupta and Spilimbergo (2004) study the Asian 1997-1998 currency crises and show that exports did not increase during this period. More generally, recent crises events (Argentina and Uruguay, 2002, Brazil 1999) underline this lack of reaction of exports to exchange rate shocks. Our study attempts to explain these stylized facts by studying the existing interactions between financial imperfections, exchange rate movements and the volume of exports. We show that, even if the four previous conditions are verified, a depreciation will have a less positive - or even a negative impact on exports, if financial market imperfections are present in the economy. Moreover, we also show that countries’ specialization and the depreciation’s magnitude may have to be taken into account to explain why the traditional competitiveness effect is not always observed.
Currency crises are characterized by two seemingly contradictory features. On the one hand, currency crises are usually “large,” in that they involve massive asset reallocations, wild swings in asset prices, and heavy output losses. On the other hand, currency crises are often triggered by shocks that seem too small to account for these effects. Although these characteristics of crises might suggest some form of irrationality, the literature has provided two types of models that account for some of these features in an environment in which agents are rational.
