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

Carlos Arteta () and Galina Hale

No 2007-02, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: 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.

Keywords: Financial; crises (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-ifn and nep-mon
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Journal Article: Currency crises and foreign credit in emerging markets: Credit crunch or demand effect? (2009)
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