Exchange Rates and Financial Fragility, Issue 7418
National Bureau of Economic Research, 1999 - Bank loans - 52 pages
In this paper we analyze three views of the relationship between the exchange rate and financial fragility: (1) the moral hazard hypothesis, according to which pegged exchange rates offer implicit insurance against exchange risk and thereby encourage reckless borrowing and lending; (2) the original sin hypothesis, which emphasizes an incompleteness in financial markets which prevents the domestic currency from being used to borrow abroad or to borrow long term even domestically; and (3) the commitment problem hypothesis, which sees financial crises as resulting from neither moral hazard nor original sin but from the weakness of the institutions that address commitment problems. We examine the evidence on these hypotheses and draw out their implications for exchange-rate policy in emerging markets.
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Argentina Asian crisis assets Australia bailout banking system banks and firms Barry Johnston bonds borrow abroad capital flows capital mobility cent central bank Chile corporations countercyclical currency mismatch denominated depreciation devaluation developed countries Development Bank domestic financial domestic-currency Economic Eichengreen emerging markets exchange rate regime exchange-rate external debt Financial Crises financial fragility financial markets financial system flexible exchange rate floating currencies floating exchange rates foreign currency foreign exposures gold standard Group of Twenty implications incentives to hedge Indonesia inflation inflows Inter-American Development Bank interest rates interest-rate international capital International Financial Architecture invest investors Korea Latin America Latin American countries lender lending liabilities loans long-term Macroeconomic maturity mismatches monetary policy Moral Hazard Hypothesis moral-hazard view NBER Working Paper Panama Panamanian pegged exchange rates percent rate and financial reporting banks Ricardo Hausmann short-term debt sovereign risk Thailand U.S. dollar unhedged exposures unpublished manuscript volatility Washington World Bank www.nber.org