European Business Schools Librarian's Group
Home About Series Subject/JEL codes Advanced Search
ESSEC Research Center, ESSEC Business School ESSEC Working Papers

No DR 03011:
Financial Instability under Floating Exchange Rates

Damien Besancenot () and Radu Vranceanu ()

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; (follow links to similar papers)

JEL-Codes: F30; G15; (follow links to similar papers)

30 pages, March 2003

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

showDeclFileRes.do?declId=5554&key=__workpaper__    PDF-file
Download Statistics

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 () or Helena Lundin ().

Programing by
Design Joakim Ekebom

Handle: RePEc:ebg:essewp:DR-03011 This page was generated on 2014-12-14 17:55:30