International Monetary Fund The Fifteenth Dubrovnik Economic Conference Croatian 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 Ivaschenko International 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 i am going to focus more on the policy relevance of the model and the paper, so skip the specific technical comments which can be discussed bilaterally

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 Obviously the model delivers the assumptions that are required, that is booms and busts, so <i will not dwell in the technicalities, we can discuss them bilaterallly <i will focus on the few specifics of the model that could be usefully adjusted and or amended to make it even better suited for the practical discussion of the crisis and its implications

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 FX lending was not only cheaper but also relaxed borrowing constraints (in expectations) ER expectations induced currencz bets on the part of unhedged individuals

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)