Self-Fulfilling Currency Crises with Borrowing Constraints and Domestic Currency Debt |
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Authors: | Nestor Azcona |
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Institution: | (1) Babson College, 231 Forest Street, Babson Park, MA 02457, USA |
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Abstract: | This paper presents a model of self-fulfilling currency crises in economies that do not suffer from domestic liability dollarization
but whose international borrowing is subject to a collateral constraint. The model shows that when the collateral is a non-traded
asset the expectation of a real exchange rate depreciation may trigger the constraint and cause a crisis in which the capital
outflow and the real depreciation reinforce each other. Since in the model debt is denominated in domestic currency this paper
highlights that borrowing constraints can cause self-fulfilling currency crises even in the absence of foreign-currency debt. |
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