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Irem Zeyneloglu
 
''Currency crises and monetary policy: the role of foreign inputs''
( 2018, Vol. 38 No.4 )
 
 
The present paper analyzes the role of imports in the occurrence of a currency crisis. For this, it extends a third generation model with balance sheet effects by introducing imports as foreign inputs in the production function. The results show that when imported inputs are financed by foreign debt the probability of a currency crisis increases for two reasons. First, the currency depreciation creates negative balance sheet effects if the price elasticity of imports is low. Second, the currency depreciation lowers the capital available for production and hence implies a direct negative effect on output. Moreover, in order to avoid a crisis monetary policy must be more aggressive compared to the case without foreign inputs.
 
 
Keywords: Currency Crises, Monetary Policy, Foreign Inputs, Exchange Rate
JEL: E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
F3 - International Finance: General
 
Manuscript Received : Aug 08 2018 Manuscript Accepted : Oct 30 2018

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