Currency crisis, monetary policy, and corporate balance sheet vulnerabilities

Sylvester Eijffinger () and Benedikt Goderis ()

No 113, Discussion Paper from Tilburg University, Center for Economic Research

Abstract: 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.

Keywords: short; term; debt (search for similar items in EconPapers)
JEL-codes: E52 E58 F34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-mon
Date: 2005
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Persistent link: http://EconPapers.repec.org/RePEc:dgr:kubcen:2005113

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