Currency crises and monetary policy: the role of foreign inputs


Zeyneloglu I.

ECONOMICS BULLETIN, vol.38, no.4, pp.2008-2016, 2018 (Journal Indexed in ESCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 38 Issue: 4
  • Publication Date: 2018
  • Title of Journal : ECONOMICS BULLETIN
  • Page Numbers: pp.2008-2016

Abstract

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.