Supply shocks and currency crises: the policy dilemma reconsidered
Miller, Marcus, García Fronti, Javier I. and Zhang, Lei (2006) Supply shocks and currency crises: the policy dilemma reconsidered. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.760).
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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.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Keynesian economics, Interest rates -- Effect of inflation on, Supply and demand, Financial crises, Devaluation of currency|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||Coventry|
|Official Date:||September 2006|
|Number of Pages:||31|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Economic and Social Research Council (Great Britain) (ESRC)|
|Grant number:||RES-051-27-0125 (ESRC), RES-156-25-0032 (ESRC)|
Aghion, P., P. Bacchetta and A. Banerjee, 2000. A simple model of monetary policy and currency crises. European Economic Review 44 (4-6), 728–738.
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