Credit Rationing and Exchange-Rate Stabilization: Examining the Relation between Financial Frictions, Exchange-Rate Volatility, Lending Rates, and Capital Inflows
This paper develops and tests a model of the relation between the volatility of the exchange rate, default rates, the level of interest rates on loans, and the availability of credit, laying emphasis on frictions in the financial market, specifically foreclosure costs to collecting bad debts. On the assumption that foreign sources of funds are crucial for domestic finance, the paper tests the hypothesis of a high positive relation between the volatility of the exchange rate and the lending rate, and between the volatility of the exchange rate and capital inflows, on a sample of 54 countries over 1980-2000. The paper finds that exchange-rate and macroeconomic volatility are strong predictors of capital inflows (but not of lending rates) and that there may be an important role for financial frictions in the transmission process. Moreover, the paper finds that episodes of disinflation that rely on a reduction of the rate of depreciation tend to be accompanied by lower exchange rate volatility (in addition to simply lower rates of devaluation). Both effects, but principally the latter through financial frictions, suggest a solution to the lack of connection between the theory and the stylized facts of exchange rate-based stabilizations: ERBS programs may lead to initial booms through should cause a significant rise in the availability of credit, even if the cost of credit does not fall by much.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Ave Maria University, Department of Economics in its series Working Papers with number
0902.
Find related papers by JEL classification: E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
This paper has been announced in the following NEP Reports: