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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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Publication status:
Published

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Publisher:
University of Oxford
Series:
Department of Economics Discussion Paper Series
Publication date:
2002-10-01
Paper number:
122
Keywords:
Pubs id:
1144305
Local pid:
pubs:1144305
Deposit date:
2020-12-15

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