The Fifteenth Dubrovnik Economic ConferenceCroatian National Bank(Dubrovnik, June 2009)

Discussion of the paper:

“Currency Mismatch and Boom-Busts in Emerging Europe”by R. Ranciere, A. Tornel, and A. Vamvakidis

Iryna IvaschenkoInternational Monetary Fund

Roadmap:

Contribution Observations Suggestions Lessons going forward

Contribution:

Theoretical thinking about current crisis and FX vulnerabilities:Possible causes:

Relative price of FX debt: (1+r)u<(1+r) ER expectations (u) Expectations of counter-cyclical policies (a)

Lessons going forward

Observations Model:

currently rationalizes the crisis ex-post: i.e expected systemic bail-out expected depreciation (and crisis)

ex-ante is helpful too: lenders mis-price credit risk lenders and borrowers mis-manage exchange rate

expectations

Some suggestions:

Model:

Borrowing constraint is cycle-and currency-dependent: variable h (generate busts) hT > hH (generate FX mismatch to relax borrowing

constraints)

Keep probability u, but introduce agents’ expectation of Etpt+1>pt:

will generate credit boom and FX mismatch will keep FX mismatch in busts if bailout is expected

Some suggestions:

Empirics:

Test mistmacth-growth relationship more: add LatAm and Asia EM to the sample, keep the

time period extend the time period beyond recent “savings

glut-crisis” period

Lessons going forward: from model calibration to policy

Growth risk-return, country level: deliver growth on the risk-return frontier: (opennes,

institutions, sup&reg)

balance FX vulnerabilities: change relative attractiveness of the T-debt

safe equilibrium in non-liberalized economy

Crisis response: bailouts if country-specific risk (ui) vs systemic (u)