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Financing Decisions of Firms and Central Bank Policy

  • Goh, Ai Ting
  • Olivier, Jacques

This Paper aims to explain the sharp rise in unhedged foreign borrowing by South East Asian corporations in the few years prior to the crisis despite remarkably little change in fundamentals. The crucial element of our story is the complementarity between decisions of firms and of the central bank, which gives rise to multiple equilibria: when firms use foreign borrowing, they raise the cost of devaluation to the central bank, which in turn makes foreign borrowing more attractive. Consequently, a small shock to fundamentals may move the economy from a region of parameter values where no foreign borrowing is one of multiple possible equilibria to a region where high foreign borrowing is the only equilibrium, thus generating a large and permanent change of the equilibrium composition of firms' borrowing. While this possibility arises even when all firms behave competitively, we show that the impact on foreign borrowing is exacerbated by strategic behaviour of firms.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3110.

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Date of creation: Nov 2001
Handle: RePEc:cpr:ceprdp:3110
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  1. Roberto Chang & Andrés Velasco, 1999. "Liquidity Crises in Emerging Markets: Theory and Policy," Documentos de Trabajo 59, Centro de Economía Aplicada, Universidad de Chile.
  2. 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.
  3. Claudia Echeverria & Salim M. Darbar & R. B. Johnston, 1997. "Sequencing Capital Account Liberalization; Lessons From the Experiences in Chile, Indonesia, Korea, and Thailand," IMF Working Papers 97/157, International Monetary Fund.
  4. Arturo Bris & Yrjo Koskinen, 2000. "Corporate Leverage And Currency Crises," Yale School of Management Working Papers ysm139, Yale School of Management, revised 01 Oct 2008.
  5. Arturo Bris & Yrjo Koskinen & Vicente Pons-Sanz, 2001. "Corporate Financial Policies and Performance Around Currency Crises," Yale School of Management Working Papers amz2563, Yale School of Management, revised 01 Oct 2008.
  6. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  7. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  8. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis?," Temi di discussione (Economic working papers) 343, Bank of Italy, Economic Research and International Relations Area.
  9. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  10. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
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