Exchange rate dynamics, balance sheet effects, and capital flows. A Minskyan model of emerging market boom-bust cycles

Karsten Kohler

No PKWP1906, Working Papers from Post Keynesian Economics Society (PKES)

Abstract: The paper provides a dynamic Minskyan open economy model of endogenous boom-bust cycles in emerging market economies, which explains the empirically observed procyclicality of exchange rates and the countercyclicality of the trade balance. It highlights the interaction of exchange rate dynamics and balance sheets. Currency appreciation makes firm balance sheets with foreign currency debt more solid. Throughout the resulting boom phase, the current account position worsens. Pressures on the domestic exchange rate mount until the currency depreciates. Contractionary balance sheet effects then set in as domestic firms face a drop in their nominal net worth. If capital inflows are driven by exogenous risk appetite, these fluctuations can assume the form of shock-independent endogenous cycles. An exogenous increase in risk appetite increases the volatility of the cycle. We find that financial account regulation can help reduce macroeconomic volatility and that the larger the risk appetite, the more financial account regulation is required to achieve this.

Keywords: Business cycles; boom-bust cycles; emerging market economies; Minsky (search for similar items in EconPapers)
JEL-codes: E11 E12 F36 F41 (search for similar items in EconPapers)
Pages: 42
Date: 2019-03
New Economics Papers: this item is included in nep-acc, nep-mac, nep-opm and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
https://postkeynesian.net/media/working-papers/PKWP1906.pdf First version, 2019 (application/pdf)

Related works:
Journal Article: Exchange rate dynamics, balance sheet effects, and capital flows. A Minskyan model of emerging market boom-bust cycles (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pke:wpaper:pkwp1906

Access Statistics for this paper

More papers in Working Papers from Post Keynesian Economics Society (PKES) Contact information at EDIRC.
Bibliographic data for series maintained by Jo Michell ().