Supply Shocks and Currency Crises: The Policy Dilemma Reconsidered

Javier Ignacio García-Fronti (), Marcus Miller () and Lei Zhang ()

No 5905, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The stylised facts of currency crises in emerging markets include output contraction coming hard on the heels of devaluation, with a prominent role for the adverse balance-sheet effects of liability dollarisation. In the light of the South East Asian experience, we propose an eclectic blend of the supply-side account of Aghion, Bacchetta and Banerjee (2000) with a demand recession triggered by balance sheet effects (Krugman, 1999). This sharpens the dilemma facing the monetary authorities - how to defend the currency without depressing the economy. But, with credible commitment or complementary policy actions, excessive output losses can, in principle, be avoided.

Keywords: contractionary devaluation; financial crises; Keynesian recession; supply and demand shocks (search for similar items in EconPapers)
JEL-codes: E12 E4 E51 F34 G18 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mac and nep-mon
Date: 2006-10
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Working Paper: Supply shocks and currency crises: the policy dilemma reconsidered (2006)
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