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The macroeconomics of carry trade gone wrong: corporate and consumer losses in emerging Europe

Egle Jakucionyte () and Sweder van Wijnbergen ()
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Egle Jakucionyte: Bank of Lithuania, Vilnius University

No 89, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: This paper analyzes the macroeconomic consequences of foreign currency losses by banks, corporates and consumers in order to find whether some allocations of losses are better from a macroeconomic perspective than others. To that end, we construct a New Keynesian DSGE model with debt overhang for corporate borrowers, monitoring costs for household mortgage debt and leverage constraints for banks. The Hungarian experience at the end of 2008 and model estimation on Hungarian data motivate these financial frictions. Model simulation shows that making corporate borrowers bear currency risk results in worse macroeconomic outcomes than shifting currency mismatch losses to banks. Foreign currency mortgages to households, however, generate lower output than currency mismatch in the banking sector. The fact that households do not suffer from debt overhang, among other reasons, is driving this result.

Keywords: Currency mismatch; household debt; corporate debt; leveraged banks; small open economy; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E44 F41 G21 P2 (search for similar items in EconPapers)
Pages: 81 pages
Date: 2021-04-22
New Economics Papers: this item is included in nep-dge, nep-mac and nep-tra
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