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Currency Mismatch and Systemic Risk in Emerging Europe

Romain Rancière, Aaron Tornell and Athanasio Vamvakidis
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Romain Rancière: PSE - Paris School of Economics, PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, IMF - International Monetary Fund - International Monetary Fund (IMF)
Aaron Tornell: UCLA - University of California [Los Angeles] - University of California
Athanasio Vamvakidis: IMF - International Monetary Fund - International Monetary Fund (IMF)


Abstract: We analyze the dual role of currency mismatch: as a vehicle that exposes the economy to systemic risk, but also as an engine of growth. We do so at the macro and the micro levels for emerging European economies in recent years. At the aggregate level, we construct a new index of currency mismatch in the banking sector that controls for lending made by banks to unhedged borrowers--i.e., those with no foreign currency income. Using our index, we find that across emerging European economies, increases in currency mismatch are associated with higher growth in tranquil times, but with a greater severity of crisis. These results are also confirmed for a broader sample of emerging economies. On net, after taking into account the crisis period, we find a positive link between currency mismatch and growth. In our firm-level analysis, we find that currency mismatch helps relax borrowing constraints and enhances firms' growth in emerging Europe. These effects are stronger across sets of financially constrained firms--those that are small and are in nontradables sectors.

Keywords: Financial Crises; Currency Mismatch; Emerging Economies; Lending Booms; Systemic Risk (search for similar items in EconPapers)
Date: 2010-01
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