Hedging and Financial Fragility in Fixed Exchange Rate Regimes / Craig Burnside, Martin Eichenbaum, Sergio Rebelo.

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Burnside, Craig

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w7143.Publication details: Cambridge, Mass. National Bureau of Economic Research 1999.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: Currency crises that coincide with banking crises tend to share four elements. First, governments provide guarantees to domestic and foreign bank creditors. Second, banks do not hedge their exchange rate risk. Third, there is a lending boom before the crises. Finally, when the currency/banking collapse occurs, interest rates rise and there is a persistent decline in output. This paper proposes an explanation for these regularities. We show that government guarantees lower interest rates and generate an economic boom. They also lead to a more fragile banking system; banks choose not to hedge exchange rate risk. When the fixed exchange rate is abandoned in favor of a crawling peg, banks go bankrupt, the domestic interest rate rises, real wages fall, and output declines.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w7143 (Browse shelf(Opens below))	Not For Loan

Total holds: 0

May 1999.

Currency crises that coincide with banking crises tend to share four elements. First, governments provide guarantees to domestic and foreign bank creditors. Second, banks do not hedge their exchange rate risk. Third, there is a lending boom before the crises. Finally, when the currency/banking collapse occurs, interest rates rise and there is a persistent decline in output. This paper proposes an explanation for these regularities. We show that government guarantees lower interest rates and generate an economic boom. They also lead to a more fragile banking system; banks choose not to hedge exchange rate risk. When the fixed exchange rate is abandoned in favor of a crawling peg, banks go bankrupt, the domestic interest rate rises, real wages fall, and output declines.