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Currency crises and foreign credit in emerging markets: Credit crunch or demand effect?

  • Hale, Galina
  • Arteta, Carlos

Currency crises of the past decade highlighted the importance of balance-sheet effects of large devaluations. Currency crisis literature identified a decline in credit as one of the channels through which such crises affect real economic activity. We find empirical evidence of the existence of this channel and quantify its extent and persistence: controlling for a host of fundamentals, we find a decline in foreign credit to emerging market private firms of about 25 percent in the first year following large depreciations. This decline is especially large in the first five months, is less pronounced in the second year, and disappears entirely by the third year. We show that only about a quarter of the initial decline in credit could be attributed to the "credit crunch," while the rest of the decline is due to contracting demand. After six months, however, most of the credit decline could be attributed to supply effects.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 53 (2009)
Issue (Month): 7 (October)
Pages: 758-774

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Handle: RePEc:eee:eecrev:v:53:y:2009:i:7:p:758-774
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