Stock Market-Induced Currency Crises: A New Type of Twins

14 Pages Posted: 14 Apr 2011

See all articles by Stefan Eichler

Stefan Eichler

Leibniz Universität Hannover; Halle Institute for Economic Research

Dominik Maltritz

Dresden University of Technology - Faculty of Economics and Business Management

Abstract

This paper explores the link between currency crises and the stock market in emerging economies. By integrating foreign stock market investors in a currency crisis model, we reveal a new fundamental inconsistency as a potential crisis trigger: since emerging economies' stock markets often have high returns, whereas central bank reserves grow slowly or decline, the amount of reserves foreign investors can deplete when selling their stocks and repatriating the proceeds grows over time and is considerably higher than funds that have been invested in the stock market. Capital withdrawals of foreign stock market investors can trigger currency crises by depleting central bank reserves, particularly in successful countries with booming stock markets and large foreign investment.

Suggested Citation

Eichler, Stefan and Maltritz, Dominik, Stock Market-Induced Currency Crises: A New Type of Twins. Review of Development Economics, Vol. 15, No. 2, pp. 223-236, 2011, Available at SSRN: https://ssrn.com/abstract=1809368 or http://dx.doi.org/10.1111/j.1467-9361.2011.00604.x

Stefan Eichler (Contact Author)

Leibniz Universität Hannover

Institute of Money and International Finance
Koenigsworther Platz 1
Hannover, 30167
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Dominik Maltritz

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

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