We examine the impact of corporate currency hedging on economic stability by introducing hedging activity in a Mundell-Fleming-Tobin framework for analyzing currency and financial crises. The ratio between hedged and unhedged firms is modelled depending on firm size as well as hedging costs. The results indicate that, with an increasing fraction of hedged firms in an economy, the magnitude of a...

☆ The first draft of this paper was written when Jamal dent at University of California, Berkeley. The author wo mous referees for useful comments; Barry Eichengreen, Rose for helpful discussions; and the UC Berkeley Irma ing. Ammar Yasser Safa provided inspiration. The finding sions expressed in this paper are entirely those of the a represent the views of the International Bank for Reco World...

he Asian currency crisis of 1997-98 was characterized by an abrupt reversal of foreign capital flows. Before the crisis, foreign capital inflows had allowed the crisis countries to attain a higher level of investment spending than could have been supported by domestic saving alone. Domestic and foreign investors suddenly lost confidence, liquidating their local asset holdings, and moving their ...

This study holds for the formation of international financial crisis and political factors for economic crisis in Turkey, are evaluated in chronological order. The international arena and relevant studies conducted in Turkey work in the literature are assessed. The main purpose of the study is to hold the linkage between the crises and political stability in Turkey in details, and to examine th...

We quantify the effects of lending and balance sheet channels on corporate investment during large crises in emerging markets. The depreciated currency creates investment opportunities in the tradable sector but firms might be financially constrained due to: 1) a deterioration of their balance sheet via un-hedged foreign currency debt (balance sheet channel) and 2) a decline in the supply of cr...

I. Recent Currency Crises A salient fact of Mexico’s and Thailand’s recent currency crises is the active role played by the monetary authority in contributing to the loss of reserves. In both cases, domestic credit showed a sizable increase, driven in part by central bank loans to the financial sector. This stands in sharp contrast with the standard economist’s model in which the proximate caus...

This paper investigates currency and financial crises in an optimizing general equilibrium model. It is shown that a rise in current and expected future budget deficits generates a real exchange rate appreciation and a decumulation of external assets, leading up to a currency crisis when foreign reserves approximate a critical level. Strong empirical support for our model is obtained by a probi...

Given current concerns on foreign currency exposures in emerging economies, we examine the currency denomination of bank loans. We compare the currency requested by borrowers and the currency decision subsequently made by a bank in Bulgaria prior to the current crisis. We analyze more than hundred thousand loans to sixty thousand different firms granted during the period 2003-2007. We relate th...

This paper is concerned with the ability of speculation to generate a currency crisis. We consider a game-theoretic setting between a unit mass of speculators and a government that holds foreign currency reserves. We analyze conditions under which the speculators may be able to force the government to devaluate the currency. Among these conditions, we analyze the role of heterogeneous beliefs, ...