Exchange rate regime and household's choice of debt

Neven Vidaković

MPRA Paper from University Library of Munich, Germany

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.

Keywords: credit; exchange rate; dynamic programming (search for similar items in EconPapers)
JEL-codes: C61 E51 E58 (search for similar items in EconPapers)
Date: 2014-03-06
New Economics Papers: this item is included in nep-mac and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/54219/1/MPRA_paper_54219.pdf original version (application/pdf)

Related works:
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:pra:mprapa:54219

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().