The transfer problem and real exchange rate overshooting in financial crises: The role of the debt servicing multiplier

Menzies, G; Vines, D

The transfer problem and real exchange rate overshooting in financial crises: The role of the debt servicing multiplier

Menzies, G

Vines, D

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Publication Type:: Journal Article
Citation:: Review of International Economics, 2008, 16 (4), pp. 709 - 727
Issue Date:: 2008-01-01

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Field	Value	Language
dc.contributor.author	Menzies, G https://orcid.org/0000-0003-4133-2282	en_US
dc.contributor.author	Vines, D	en_US
dc.date.issued	2008-01-01	en_US
dc.identifier.citation	Review of International Economics, 2008, 16 (4), pp. 709 - 727	en_US
dc.identifier.issn	0965-7576	en_US
dc.identifier.uri	http://hdl.handle.net/10453/9950
dc.description.abstract	We develop a real model of exchange rate overshooting due to a debt servicing multiplier. Borrowers of foreign capital are bound by noncontingent contracts to pay the world rate of return following an adverse shock. This is onerous, since the marginal product of capital is less than the world rate of return and the shock causes some capital to become extra-marginal. If the resultant debt servicing shortfall is met by taxes on workers, this reduces their demand for nontradable goods, which feeds back onto their wage, reducing their demand for nontradable goods, etc. In the short run, when extra-marginal projects are "stuck" in the economy, the real exchange rate can overshoot. This mechanism may help to explain overshooting of exchange rates in the 1997 Asian financial crisis. © 2008 The Authors Journal compilation © 2008 Blackwell Publishing Ltd.	en_US
dc.relation.ispartof	Review of International Economics	en_US
dc.relation.isbasedon	10.1111/j.1467-9396.2008.00765.x	en_US
dc.subject.classification	Economics	en_US
dc.title	The transfer problem and real exchange rate overshooting in financial crises: The role of the debt servicing multiplier	en_US
dc.type	Journal Article
utslib.citation.volume	4	en_US
utslib.citation.volume	16	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1401 Economic Theory	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Economics Discipline
utslib.copyright.status	closed_access
pubs.issue	4	en_US
pubs.publication-status	Published	en_US
pubs.volume	16	en_US

Abstract:

We develop a real model of exchange rate overshooting due to a debt servicing multiplier. Borrowers of foreign capital are bound by noncontingent contracts to pay the world rate of return following an adverse shock. This is onerous, since the marginal product of capital is less than the world rate of return and the shock causes some capital to become extra-marginal. If the resultant debt servicing shortfall is met by taxes on workers, this reduces their demand for nontradable goods, which feeds back onto their wage, reducing their demand for nontradable goods, etc. In the short run, when extra-marginal projects are "stuck" in the economy, the real exchange rate can overshoot. This mechanism may help to explain overshooting of exchange rates in the 1997 Asian financial crisis. © 2008 The Authors Journal compilation © 2008 Blackwell Publishing Ltd.

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http://hdl.handle.net/10453/9950