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Market Sentiment and Macroeconomic Fluctuations under Pegged Exchange Rates

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  • PIERRE-RICHARD AG�NOR
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    Abstract

    The effects of an adverse change in market sentiment, defined as a temporary increase in the premium faced by domestic borrowers on world financial markets, are studied in an intertemporal optimizing framework with imperfect capital mobility. Firms' demands for working capital are financed by bank credit. The shock leads to a rise in domestic interest rates, capital outflows and a drop in official reserves, a reduction in bank deposits and loans, a contraction in output, and an increase in unemployment. These predictions are consistent with Argentina's economic downturn in the immediate aftermath of the Mexican peso crisis of December 1994. Copyright (c) The London School of Economics and Political Science 2006.

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    Bibliographic Info

    Article provided by London School of Economics and Political Science in its journal Economica.

    Volume (Year): 73 (2006)
    Issue (Month): 292 (November)
    Pages: 579-604

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    Handle: RePEc:bla:econom:v:73:y:2006:i:292:p:579-604

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    Cited by:
    1. Pierre-Richard Agénor & Peter Montiel, 2008. "Monetary Policy Analysis in a Small Open Credit-Based Economy," Open Economies Review, Springer, vol. 19(4), pages 423-455, September.
    2. Koray Alper, 2007. "Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections," Working Papers 0707, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    3. Aloy, Marcel & Moreno-Dodson, Blanca & Nancy, Gilles, 2008. "Intertemporal adjustment and fiscal policy under a fixed exchange rate regime," Policy Research Working Paper Series 4607, The World Bank.

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