Les Cahiers de Recherche - HEC Paris
Jacques OLIVIER and Ai-Ting GOH
Financing decisions of firms and central bank policy
Abstract: This paper aims to explain the sharp rise in unhedged
foreign borrowing by South East Asian corporations in the few years prior
to the crisis despite remarkably little change in fundamentals. The crucial
element of our story is the strategic interaction between firms and the
central bank, which gives rise to multiple equilibria: when firms use
foreign borrowing, they raise the cost of devaluation to the central bank,
which in turn makes foreign borrowing more attractive. Consequently, a
small shock to fundamentals may have a large and permanent effect on the
equilibrium composition of firms' borrowing.
Keywords: foreign borrowing; Asian crisis; (follow links to similar papers)
JEL-Codes: E58; F34; (follow links to similar papers)
30 pages, April 1, 2001
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