TY - JOUR
T1 - Determining underlying macroeconomic fundamentals during emerging market crises
T2 - Are conditions as bad as they seem?
AU - Aguiar, Mark
AU - Broner, Fernando A.
N1 - Funding Information:
We thank Daron Acemoglu, Ricardo Caballero, Guillermo Calvo, Rudi Dornbusch, Roberto Rigobon, Jaume Ventura, Alwyn Young, an anonymous referee, and participants of seminars at MIT, University of Chicago, University of Maryland, and University of Michigan for their helpful comments. We also thank Daniel Volberg for valuable research assistance. All remaining errors are ours. Aguiar thanks the Sloan Foundation and Chicago GSB for research support. Broner thanks the Ministerio de Ciencia y Tecnología de España, Plan Nacional de I+D+I and FEDER (ref: SEC2002-03816), the Generalitat de Catalunya, and CREA-Barcelona Economics for financial support. The views expressed in this paper are not necessarily those of the Federal Reserve Bank of Boston or the Federal Reserve System.
PY - 2006/5
Y1 - 2006/5
N2 - Emerging market crises are characterized by large swings in both macroeconomic fundamentals and asset prices. The economic significance of observed movements in macroeconomic variables is obscured by the brief and extreme nature of crises. In this paper we propose to study the macroeconomic consequences of crises by studying the behavior of "effective" fundamentals, constructed by studying the relative movements of stock prices during crises. We find that these effective fundamentals provide a different picture than that implied by observed fundamentals. First, asset prices often reflect expectations of improvement in fundamentals after the initial devaluations; specifically, effective depreciations are positive but not as large as the observed ones. Second, crises vary in their effect on credit market conditions, with investors expecting tightening of credit in some cases (Mexico 1994, Philippines 1997), but loosening of credit in others (Sweden 1992, Korea 1997, Brazil 1999).
AB - Emerging market crises are characterized by large swings in both macroeconomic fundamentals and asset prices. The economic significance of observed movements in macroeconomic variables is obscured by the brief and extreme nature of crises. In this paper we propose to study the macroeconomic consequences of crises by studying the behavior of "effective" fundamentals, constructed by studying the relative movements of stock prices during crises. We find that these effective fundamentals provide a different picture than that implied by observed fundamentals. First, asset prices often reflect expectations of improvement in fundamentals after the initial devaluations; specifically, effective depreciations are positive but not as large as the observed ones. Second, crises vary in their effect on credit market conditions, with investors expecting tightening of credit in some cases (Mexico 1994, Philippines 1997), but loosening of credit in others (Sweden 1992, Korea 1997, Brazil 1999).
KW - Asset returns
KW - Credit market conditions
KW - Emerging market crises
KW - Exchange-rate overshooting
KW - Macroeconomic fundamentals
KW - Sudden stops
UR - http://www.scopus.com/inward/record.url?scp=33744541080&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=33744541080&partnerID=8YFLogxK
U2 - 10.1016/j.jmoneco.2005.02.005
DO - 10.1016/j.jmoneco.2005.02.005
M3 - Article
AN - SCOPUS:33744541080
SN - 0304-3932
VL - 53
SP - 699
EP - 724
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
IS - 4
ER -