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Financing decisions of firms and central bank policy

Listed author(s):
  • OLIVIER, Jacques
  • GOH, Ai-Ting

    (Universite Catholique de Louvain)

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 strategic interaction between firms and 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 have a large and permanent effect on the equilibrium composition of firms' borrowing.

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File URL: http://www.hec.fr/var/fre/storage/original/application/67b1ce5228957753cd55bb214d8e66d5.pdf
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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 731.

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Length: 30 pages
Date of creation: 01 Apr 2001
Handle: RePEc:ebg:heccah:0731
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  1. Bris, Arturo & Koskinen, Yrjo, 2002. "Corporate leverage and currency crises," Journal of Financial Economics, Elsevier, vol. 63(2), pages 275-310, February.
  2. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 1999. "A Simple Model of Monetary Pollicy and Currency Crises," Working Papers 99.05, Swiss National Bank, Study Center Gerzensee.
  3. 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.
  4. Arturo Bris & Yrjö Koskinen & Vicente Pons, 2004. "Corporate Financial Policies and Performance around Currency Crises," The Journal of Business, University of Chicago Press, vol. 77(4), pages 749-796, October.
  5. Roberto Chang & Andrés Velasco, 1999. "Liquidity Crises in Emerging Markets: Theory and Policy," Documentos de Trabajo 59, Centro de Economía Aplicada, Universidad de Chile.
  6. 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.
  7. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
  8. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  9. 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, .
  10. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
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