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Exchange rate regime and household's choice of debt

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  • Vidakovic, Neven

Abstract

The paper looks at the impact of the exchange rate regime and the household’s choice of debt. One of the characteristics of economic transition in eastern European countries was an increase in overall debt holding. Standard economic theory assumes the relationship S=I. According to this relationship the households should use debt only for purchases of durable goods; however in some eastern European countries there was a large increase in consumer loans which are not recognized under standard no-ponzi assumption of economic models. This paper aims to investigate the case when debt is used to live above household’s budget constraint. Our model shows a significant impact on the choice of the amount the debt the households are willing to hold is due to the choice of the exchange rate regime made by the central bank. The models investigates household’s behavior in two main cases: stable exchange rate regime (exchange rate regime with FX risk) and variable exchange rate regime (exchange rate regime without exchange rate risk). The households make different choices under alternate exchange rate regime; this pattern of is behavior shown in the model and verified by the data.

Suggested Citation

  • Vidakovic, Neven, 2014. "Exchange rate regime and household's choice of debt," MPRA Paper 54219, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:54219
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    File URL: https://mpra.ub.uni-muenchen.de/54219/1/MPRA_paper_54219.pdf
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    References listed on IDEAS

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    1. Timothy Cogley & Thomas J. Sargent, 2008. "Anticipated Utility And Rational Expectations As Approximations Of Bayesian Decision Making," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(1), pages 185-221, February.
    2. Neven Vidakovic, 2007. "The Impact Of The Choice Of Monetary Policyon Households," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 3(6), pages 109-120.
    3. Michael Woodford, 2006. "An Example of Robustly Optimal Monetary Policy with Near-Rational Expectations," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 386-395, 04-05.
    4. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, January.
    5. Roger E.A. Farmer & Daniel F. Waggoner & Tao Zha, 2007. "Understanding the New-Keynesian Model when Monetary Policy Switches Regimes," NBER Working Papers 12965, National Bureau of Economic Research, Inc.
    6. Roger E. A. Farmer & Daniel F. Waggoner & Tao Zha, 2009. "Indeterminacy in a forward-looking regime switching model," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 69-84.
    7. Kraft, Evan & Jankov, Ljubinko, 2005. "Does speed kill? Lending booms and their consequences in Croatia," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 105-121, January.
    8. Joseph G. Pearlman & Thomas J. Sargent, 2005. "Knowing the Forecasts of Others," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 480-497, April.
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    More about this item

    Keywords

    credit; exchange rate; dynamic programming;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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