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Volatility and Growth$
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Philippe Aghion and Abhijit Banerjee

Print publication date: 2005

Print ISBN-13: 9780199248612

Published to Oxford Scholarship Online: January 2007

DOI: 10.1093/acprof:oso/9780199248612.001.0001

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The Third Generation Approach to Currency Crises

The Third Generation Approach to Currency Crises

(p.90) 5 The Third Generation Approach to Currency Crises
Volatility and Growth

Phillippe Aghion (Contributor Webpage)

Abhijit Banerjee (Contributor Webpage)

Oxford University Press

This chapter presents a highly stylized model, based on limited access to credit that can explain why an economy that is carrying a large amount of foreign currency debt might be vulnerable to currency crises, leaving it with a depreciated currency and GDP that remains lower than the pre-crisis trend for some time into the future. It is argued that in a monetary economy with standard price rigidities, credit constraints together with pecuniary externalities working through the nominal exchange rate are sufficient to generate currency crises.

Keywords:   credit constraints, foreign currency debt, currency crises, monetary economy, pecuniary externalities, exchange rate

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