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Debt Overhang and Real Exchange Rate Overshooting in the Asian Crisis.

Abstract:

We develop a stylized real model of the Asian crisis where an adverse extenal shock can lead to real exchange rate overshooting. Domestic borrowers of foreign capital are bound by debt contracts even when the capital is unable to earn the world rate of return. Following an adverse shock, the requirement to honour these debt contracts leads to a debt overhang. In the long run, when capital becomes mobile, extra-marginal projects are shut down as capital departs, and the real exchange rate fall...

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Volume:
122
Series:
Discussion paper series
Publication date:
2002-01-01
URN:
uuid:5f911603-c34c-49a1-9561-dd3ada9f3bf2
Local pid:
ora:1159
Language:
English

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