Currency Crises and Foreign Credit in Emerging Markets: Credit Crunch or Demand Effect?

34 Pages Posted: 22 Jan 2007

See all articles by Galina Hale

Galina Hale

University of California, Santa Cruz

Carlos Oscar Arteta

Board of Governors of the Federal Reserve - Division of International Finance (IFDP)

Date Written: January 2007

Abstract

Currency crises of the past decade highlighted the importance of balance-sheet effects of currency crises. In credit-constrained markets such effects may lead to further declines in credit. Controlling for a host of fundamentals, we find a systematic decline in foreign credit to emerging market private firms of about 25% in the first year following currency crises, which we define as large changes in real value of the currency. This decline is especially large in the first five months, lessens in the second year and disappears entirely by the third year. We identify the effects of currency crises on the demand and supply of credit and find that the decline in the supply of credit is persistent and contributes to about 8% decline in credit for the first two years, while the 35% decline in demand lasts only five months.

Keywords: currency crises, credit rationing, balance--sheet effects, credit constraints, original sin

JEL Classification: F34, F32, G32

Suggested Citation

Hale, Galina and Arteta, Carlos Oscar, Currency Crises and Foreign Credit in Emerging Markets: Credit Crunch or Demand Effect? (January 2007). Available at SSRN: https://ssrn.com/abstract=958445 or http://dx.doi.org/10.2139/ssrn.958445

Galina Hale (Contact Author)

University of California, Santa Cruz ( email )

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Santa Cruz, CA 95064
United States

Carlos Oscar Arteta

Board of Governors of the Federal Reserve - Division of International Finance (IFDP) ( email )

20th St. and Constitution Ave.
Mail Stop 24
Washington, DC 20551
United States
202-452-2762 (Phone)
202-736-5638 (Fax)

HOME PAGE: http://www.federalreserve.gov/research/staff/artetacarloso.htm

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