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Supply shocks and currency crises : the policy dilemma reconsidered

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  • García-Fronti, Javier

    (University of Warwick and CSGR, University of Warwick)

  • Miller, Marcus

    (University of Warwick, Centre for Economic Policy Research and CSGR, University of Warwick)

  • Zhang, Lei

    (University of Warwick and CSGR, University of Warwick)

Abstract

The stylised facts of currency crises in emerging markets include output contraction coming hard on the heels of devaluation, with a prominent role for the adverse balance-sheet effects of liability dollarisation. In the light of the South East Asian experience, we propose an eclectic blend of the supply-side account of Aghion, Bacchetta and Banerjee (2000) with a demand recession triggered by balance sheet effects (Krugman, 1999). This sharpens the dilemma facing the monetary authorities - how to defend the currency without depressing the economy. But, with credible commitment or complementary policy actions, excessive output losses can, in principle, be avoided.

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 760.

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Length: 30 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:wrk:warwec:760

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Keywords: Supply and demand shocks ; financial crises ; contractionary devaluation ; Keynesian recession;

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  1. Ennis, Huberto M. & Keister, Todd, 2003. "Economic growth, liquidity, and bank runs," Journal of Economic Theory, Elsevier, vol. 109(2), pages 220-245, April.
  2. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  3. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2000. "Currency Crises and Monetary Policy in an Economy with Credit Constraints," Working Papers 00.07, Swiss National Bank, Study Center Gerzensee.
  4. Olivier Jean Blanchard & Danny Quah, 1990. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  5. Fratzscher, Marcel, 2002. "On currency crises and contagion," Working Paper Series 0139, European Central Bank.
  6. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  7. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2000. "A simple model of monetary policy and currency crises," European Economic Review, Elsevier, vol. 44(4-6), pages 728-738, May.
  8. Frankel, Jeffrey, 2005. "Contractionary Currency Crashes In Developing Countries," Working Paper Series rwp05-017, Harvard University, John F. Kennedy School of Government.
  9. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," IDB Publications 6516, Inter-American Development Bank.
  10. Marcus Miller & Joseph Stiglitz, 1999. "Bankruptcy Protection Against Macroeconomics Shocks: The case for a 'super Chapter 11'," CSGR Hot Topics: Research on Current Issues 08, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  11. Kaplan, Ethan & Rodrik, Dani, 2001. "Did the Malaysian Capital Controls Work?," Working Paper Series rwp01-008, Harvard University, John F. Kennedy School of Government.
  12. VJeffrey A. Frankel, 2005. "Mundell-Fleming Lecture: Contractionary Currency Crashes in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 149-192, September.
  13. John Williamson, 1999. "Implications of the East Asian Crisis for Debt Management," CSGR Hot Topics: Research on Current Issues 05, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  14. Joseph E. Stiglitz, 1999. "Reforming the Global Economic Architecture: Lessons from Recent Crises," Journal of Finance, American Finance Association, vol. 54(4), pages 1508-1522, 08.
  15. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2002. "IS-LM-BP in the Pampas," NBER Working Papers 9337, National Bureau of Economic Research, Inc.
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Cited by:
  1. Bergman, U. Michael & Jellingsø, Mads, 2010. "Monetary policy during speculative attacks: Are there adverse medium term effects?," The North American Journal of Economics and Finance, Elsevier, vol. 21(1), pages 5-18, March.

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