European Business Schools Librarian's Group

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 202: Financial Crises and the Benefits of Mildly Repressed Exchange Rates

Pan A. Yotopoulos ()
Additional contact information
Pan A. Yotopoulos: Food Research Institute, Postal: FRI-417 Galvez Mall, Stanford University, Stanford, CA 94305, USA

Abstract: The devaluation of the Mexican peso of 1995 along with the more recent financial crises in emerging economies are viewed as systematic outcomes of the operation of free currency markets. The hypothesis is that there exists a distortion in free currency markets that makes developing countries systematically misallocate resources. The distortion lies in "asymmetric reputation" that leads to substitution of the reserve currency for the country's soft currency in liquid asset holdings, thus making systemic devaluations inevitable. Moreover, the empirical analysis shows that currency-substitution-led endemic devaluations misallocate resources in competitive devaluation trade, as opposed to comparative advantage trade. In a case that is parallel to asymmetric information and incomplete credit markets, the appropriate policy intervention in asymmetric-reputation driven incomplete currency markets is maintaining mildly repressed exchange rates. The operational definition of "mild" is imposing restrictions on the home-grown variety of currency substitution.

Keywords: Asymmetric reputation; incomplete markets; contractionary devaluations; free currency markets

JEL-codes: F31; F41; G15

21 pages, October 27, 1997

Full text files 

hastef0202.pdf.zip PDF-file Full text
hastef0202.pdf PDF-file Full text
hastef0202.ps.zip PostScript file Full text
hastef0202.ps PostScript file Full text

Download statistics

Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2024-03-10 04:35:58.