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Currency crises, monetary policy and corporate balance sheet vulnerabilities

Listed author(s):
  • Eijffinger, S.C.W.

    (Tilburg University, School of Economics and Management)

  • Goderis, B.V.G.

    (Tilburg University, School of Economics and Management)

This paper studies how the exposure of a country's corporate sector to interest rate and exchange rate changes affects the probability of a currency crisis.To analyze this question, we present a model that defines currency crisis as situations in which the costs of maintaining a fixed exchange rate exceed the costs of abandonment.The results show that a higher exposure to interest rate changes increaes the probability of crisis through an increased need for output loss compensation and an increased efficacy of monetary policy in stimulating output.A higher exposure to exchange rate changes also increases the need for output loss compensation.However, it lowers the efficacy of monetary policy in stimulating output through the adverse balance sheet effects of exchange rate depreciation.As a result, its effects on the probability of crisis is ambiguous.

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Paper provided by Tilburg University, School of Economics and Management in its series Other publications TiSEM with number efb2b284-5150-4ad4-aa63-c91aabd806b7.

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Date of creation: 2007
Publication status: Published in German Economic Review (2007), v.8, nr.3, p.309-343
Handle: RePEc:tiu:tiutis:efb2b284-5150-4ad4-aa63-c91aabd806b7
Contact details of provider: Web page: https://www.tilburguniversity.edu/about/schools/economics-and-management/

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  1. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "A corporate balance-sheet approach to currency crises," Journal of Economic Theory, Elsevier, vol. 119(1), pages 6-30, November.
  2. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521466004, March.
  3. 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.
  4. 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.
  5. Eijffinger, Sylvester & Haan, Jakob de, 2000. "European Monetary and Fiscal Policy," OUP Catalogue, Oxford University Press, number 9780198776161.
  6. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
  7. Dornbusch, Rudi, 1999. "After Asia: New Directions for the International Financial System," Journal of Policy Modeling, Elsevier, vol. 21(3), pages 289-299, May.
  8. Harold L. Cole & Timothy J. Kehoe, 1996. "A self-fulfilling model of Mexico's 1994-95 debt crisis," Staff Report 210, Federal Reserve Bank of Minneapolis.
  9. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521460477, March.
  10. Cole, Harold L. & Kehoe, Timothy J., 1996. "A self-fulfilling model of Mexico's 1994-1995 debt crisis," Journal of International Economics, Elsevier, vol. 41(3-4), pages 309-330, November.
  11. Corsetti, G. & Cavallari, L., 1996. "Policy Making and Speculative Attacks in Models of Exchange Rate Crises: A Synthesis," Papers 752, Yale - Economic Growth Center.
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