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

  • Galina Hale
  • Carlos Arteta

Currency crises of the past decade highlighted the importance of balance-sheet effects of currency crises. In credit-constrained markets such effects may lead to further declines in credit. Controlling for a host of fundamentals, we find a systematic decline in foreign credit to emerging market private firms of about 25% in the first year following currency crises, which we define as large changes in real value of the currency. This decline is especially large in the first five months, lessens in the second year and disappears entirely by the third year. We identify the effects of currency crises on the demand and supply of credit and find that the decline in the supply of credit is persistent and contributes to about 8% decline in credit for the first two years, while the 35% decline in demand lasts only five months.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2007-02.

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Date of creation: 2007
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Handle: RePEc:fip:fedfwp:2007-02
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