Journal of Currency Crisis Edited by Faridul Islam Printed Edition of the Special Issue Published in Journal of Risk and Financial Management www.mdpi.com/journal/jrfm Currency Crisis Currency Crisis Special Issue Editor Faridul Islam MDPI • Basel • Beijing • Wuhan • Barcelona • Belgrade Special Issue Editor Faridul Islam Department of Economics, Morgan State University USA Editorial Office MDPI St. Alban-Anlage 66 4052 Basel, Switzerland This is a reprint of articles from the Special Issue published online in the open access journal Journal of Risk and Financial Management (ISSN 1911-8074) from 2018 to 2019 (available at: https:// www.mdpi.com/journal/jrfm/special issues/currency crisis) For citation purposes, cite each article independently as indicated on the article page online and as indicated below: LastName, A.A.; LastName, B.B.; LastName, C.C. Article Title. Journal Name Year, Article Number, Page Range. ISBN 978-3-03921-578-2 (Pbk) ISBN 978-3-03921-579-9 (PDF) c 2019 by the authors. Articles in this book are Open Access and distributed under the Creative Commons Attribution (CC BY) license, which allows users to download, copy and build upon published articles, as long as the author and publisher are properly credited, which ensures maximum dissemination and a wider impact of our publications. The book as a whole is distributed by MDPI under the terms and conditions of the Creative Commons license CC BY-NC-ND. Contents About the Special Issue Editor ...................................... vii Preface to “Currency Crisis” ....................................... ix Faridul Islam Currency Crisis: Are There Signals to Read? Reprinted from: jrfm 2019, 12, 128, doi:10.3390/jrfm12030128 ..................... 1 Colin Ellis and Emilia Gyoerk Investigating the Economic and Financial Damage around Currency Peg Failures Reprinted from: jrfm 2019, 12, 92, doi:10.3390/jrfm12020092 ..................... 5 Agus Salim and Kai Shi A Cointegration of the Exchange Rate and Macroeconomic Fundamentals: The Case of the Indonesian Rupiah vis-a-vis´ Currencies of Primary Trade Partners Reprinted from: jrfm 2019, 12, 87, doi:10.3390/jrfm12020087 ..................... 21 Georgina M. G´omez Money as an Institution: Rule versus Evolved Practice? Analysis of Multiple Currencies in Argentina Reprinted from: jrfm 2019, 12, 80, doi:10.3390/jrfm12020080 ..................... 38 Patrick Collins, Jameel Ahmed and Ahamed Kameel Meera Simulation of the Grondona System of Conditional Currency Convertibility Based on Primary Commodities, Considered as a Means to Resist Currency Crises Reprinted from: jrfm 2019, 12, 75, doi:10.3390/jrfm12020075 ..................... 52 Linh My Tran, Chi Hong Mai, Phuoc Huu Le, Chi Linh Vu Bui, Linh Viet Phuong Nguyen and Toan Luu Duc Huynh Monetary Policy, Cash Flow and Corporate Investment: Empirical Evidence from Vietnam Reprinted from: jrfm 2019, 12, 46, doi:10.3390/jrfm12010046 ..................... 72 Mohsen Bahmani-Oskooee and Majid Maki-Nayeri † Asymmetric Effects of Policy Uncertainty on the Demand for Money in the United States Reprinted from: jrfm 2019, 12, 1, doi:10.3390/jrfm12010001 ...................... 86 Matthew Harrison and Geng Xiao China and Special Drawing Rights—Towards a Better International Monetary System Reprinted from: jrfm 2019, 12, 60, doi:10.3390/jrfm12020060 ..................... 99 v About the Special Issue Editor Faridul Islam is a Professor of Economics at Morgan State University, Baltimore, MD. Farid earned his MS from the London School of Economics and his PhD from University of Illinois-Urbana under the supervision of Paul Newbold. His dissertation used quarterly seasonal US data to forecast the performance of the major macroeconomic series. After graduation, he worked at the erstwhile Wharton Econometric Forecast Associates, PA, before joining the ranks of faculty. His current research broadly covers different areas of economics/finance, with implications for public policy. He is currently interested in our opioid crisis, which he considers a real challenge and perhaps the nation’s most serious test, requiring immediate public policy intervention by the US government. Aside from academic activities, he is engaged in service to the profession, the University, and the community. He has served on over two dozen Ph.D. dissertation committees in the US and abroad. His papers have appeared in quality outlets, including Economics Letters, Industrial Relations, Economic Modelling, International Trade Journal, Journal of Asian Economics, Journal of Economic Education, Structural Change & Econ Dynamics, Australian Economic Papers, Empirical Econ, Economic Change & Restrg., Journal of Econ Dev, Journal of Developing Areas, Indian Econ Review, Indian Econ Journal, Econ Bulletin, Journal of Bus Econ & Mgmt., South Asian Econ Journal, and Bangladesh Dev Studies. He has several manuscripts with review/resubmit status. He presents papers regularly at national and international conferences, which helps to establish and expand his professional network and to stay engaged effectively in research and publishing. vii Preface to “Currency Crisis” The 2008 financial crisis was the worst economic calamity since the Great Depression. By some estimates, the toll it took runs into the trillions of dollars. The collapse of Lehman Brothers, which required huge sums of money for a bail out, nearly brought down the global financial system. This was contained by a monetary and fiscal stimulus, which prevented another great depression. The pace of recovery has remained feeble relative to prior post-war upturns. Europe’s crisis evolved into the euro crisis, as GDP failed to pick up. The Fed has mostly remained monetary policy-centric. Faridul Islam Special Issue Editor ix Journal of Risk and Financial Management Editorial Currency Crisis: Are There Signals to Read? Faridul Islam Department of Economics, Morgan State University, Baltimore, MD 21251, USA; [email protected] Received: 18 July 2019; Accepted: 23 July 2019; Published: 2 August 2019 Abstract: Financial crisis is nothing new in the annals of history of the capitalistic path of economic development; it is a part of the business cycle. The theoretical basis is well entrenched in the concept of ‘Keynesian Cross’. The tale of crisis, dating back centuries, has taken a new turn with the call for more globalization—liberalize trade and open up the financial sector. This has made many nations vulnerable to crises that are likely to be repeated, perhaps frequently. Based on recent experience, warning signs can be read from the dollar-centric exchange rate, the mainstay for the stability of the current global financial system. To a careful observer, fatigue in the system cannot be overlooked. Keywords: China; Special Drawing Right; international monetary system; reserve currency; RMB internationalization; mortgage crisis; default swap; derivative; Asian crisis; LIBOR The 2008 financial crisis was the worst economic calamity since the Great Depression. By some estimates, the toll it took runs into the trillions. The collapse of the Lehman Brothers, which required huge sums of money for bail out, nearly brought down the global financial system, was contained by monetary and fiscal stimulus and prevented another great depression. The pace of recovery remains feeble relative to prior post-war upturns. Europe’s crisis evolved into the euro crisis, as GDP failed to pick up. The Fed has mostly remained monetary policy-centric. The first sign of trouble surfaced in 2006 when housing prices started to fall. Realtors failed to realize that many homeowners had dubious credit sources, blamed on the subprime loans when the real culprit was the banks’ ability to engage in trading with profitable derivatives, and then sell them to investors. The derivatives created an insatiable demand for even more mortgages. While hard to believe, the Fed had thought the subprime mortgage crisis would stay within the housing sector alone or that they didn’t understand the actual causes of the crisis until much later (well, so they claim). Hedge funds and other financial institutions owned the mortgage-backed securities, spread to mutual- and pension funds; and corporate assets. The banks had chopped up the original mortgages and resold them in tranches. This made it impossible to price the derivatives, which are contracts that allow businesses, investors, and municipalities to transfer risks and rewards associated with commercial or financial outcomes to other parties. Holding a derivative contract can reduce the risk of bad harvests, adverse market fluctuations, or negative events like a bond default. Each derivatives transaction is like a stock or bond trade—one party wants to increase its exposure to a specific risk as the other moves in the other way. Derivatives derive their values from its price, volatility, and risk of an underlying stock, bond, commodity, interest rate, or exchange rates. The price is a function of the price of the above listed items. Some derivatives, like stock equity options and credit default swaps remain contingent on future events. Others, such as commodities, futures contracts, and interest-rate swaps, are more explicit contract exchanges, such as a specified number of items on a specified date in the future for a certain price. The pension funds bought risky assets thinking that the insurance product—credit default swaps—would protect them. The American International Group (AIG) sold these swaps. As the derivatives lost value, AIG lacked the cash flow to honor every swap.