Financial Crises, Monetary Policy and Financial Fragility; A Second-Generation Model of Currency Crises
AbstractIn this Paper we present a model that combines the second-generation trade-off between costs of maintenance and abandonment with possible balance-sheet problems in the corporate sector. We show how debt levels can move a small economy from a fixed exchange rate to a floating exchange rate equilibrium or vice versa, simply by altering the trade-off faced by the monetary authorities. Even if the monetary authorities still have a substantial amount of foreign reserves available to guarantee the fixed value of the currency, they might choose not to and abandon the fixed exchange rate regime. Although it is often argued that first- and second-generation literature have not been able to explain the crisis in East Asia (1997-98), our model suggests that adding corporate balance sheet positions to second-generation models could substantially improve the explanatory power of these models in the case of the Asian crisis.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3637.
Date of creation: Nov 2002
Date of revision:
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Other versions of this item:
- Eijffinger, S.C.W. & Goderis, B., 2002. "Financial crises, monetary policy and financial fragility: A second-generation model of currency crises," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152957, Tilburg University.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-03-14 (All new papers)
- NEP-IFN-2003-03-14 (International Finance)
- NEP-MAC-2003-03-17 (Macroeconomics)
- NEP-PKE-2003-03-14 (Post Keynesian Economics)
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