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ZEPPELIN Chair of International Economics

Research Projects

Foreign Currency Loans and Financial Vulnerability: Loan Arrears in CEECs

Project Description

Foreign currency loans play a special role for the financial vulnerability in CEECs. Ranciere et al. (2010) asses positively the positive contribution of foreign currency loans which improve the access to finance in emerging markets with less developed financial sector. By contrast, they are generally viewed to be prone to higher financial risks due to exchange rate risk. Likewise, foreign currency loans are often viewed as risky financial product which should be taken only by firms and households with income in foreign currency. By contrast, Jeanne (2005) shows that this generally accepted knowledge is not true if domestic monetary policy is incredible and subject to frequent changes. In particular, unpredictable domestic monetary policy increases the risk related to domestic debt. Unanticipated disinflation may result in comparably high real interest rates and loan installments. In turn, adjustable exchange rate equalizes interest rate on foreign currency loans to the expected level. Hence, foreign currency loans provide an insurance against high domestic inflation volatility. Fidrmuc et al. (2011) confirm that credibility of domestic and foreign lending conditions represent a major determinant of currency decisions for households in CEECs. Similarly, Beckmann et al. (2011) show that foreign currency are perceived as more attractive than local currency loans despite their perceived risk

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Project Duration

from 01.05.2011 through 31.12.2013

Project Head

Prof. Dr. Jarko Fidrmuc

Project Execution



Financing

eigenfinanziertes Forschungsprojekt



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