European Business Schools Librarian's Group
ESSEC Working Papers,
ESSEC Research Center, ESSEC Business School
No DR 03011: Financial Instability under Floating Exchange Rates
Damien Besancenot () and Radu Vranceanu ()
Additional contact information
Damien Besancenot: University of Paris 2 and ERMES, Postal: 92 rue d'Assas, 75007 PARIS, FRANCE
Radu Vranceanu: ESSEC Business School, Postal: Avenue Bernard Hirsch - B.P.105, 95021 CERGY-PONTOISE CEDEX FRANCE
Abstract: At the end of the nineties, many developing countries featured an open capital market and relied heavily on dollar-debt financing of their economy. This paper analyses whether, in this context, clean floating can be a sustainable policy choice. The model is cast as a game between successive generations of investors who decide whether they buy or not the debt of a representative firm. The exchange rate is subject to random shocks, which makes uncertain the private sector’s solvency. We show that a small risk of insolvency would bring about a much larger risk of illiquidity. A rational expectation equilibrium without default can be put forward only in the highly improbable case when the currency is extremely overvalued. The case against flexible exchange rates may be stronger than usually thought.
Keywords: Floating; Rational Expectations; Financial Crises; Developing Countries
30 pages, March 2003
Full text files
showDeclFileRes.do?declId=5554&key=__workpaper__
Questions (including download problems) about the papers in this series should be directed to Sophie Magnanou ()
Report other problems with accessing this service to Sune Karlsson ().
This page generated on 2024-02-05 15:47:16.