Market Sentiment and Macroeconomic Fluctuations Under Pegged Exchange Rates

26 Pages Posted: 12 Oct 2006

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Abstract

The effects of an adverse change in market sentiment, defined as a temporary increase in the premium faced by domestic borrowers on world financial markets, are studied in an intertemporal optimizing framework with imperfect capital mobility. Firms' demands for working capital are financed by bank credit. The shock leads to a rise in domestic interest rates, capital outflows and a drop in official reserves, a reduction in bank deposits and loans, a contraction in output, and an increase in unemployment. These predictions are consistent with Argentina's economic downturn in the immediate aftermath of the Mexican peso crisis of December 1994.

Suggested Citation

Agenor, Pierre-Richard, Market Sentiment and Macroeconomic Fluctuations Under Pegged Exchange Rates. Economica, Vol. 73, No. 292, pp. 579-604, November 2006. Available at SSRN: https://ssrn.com/abstract=936461 or http://dx.doi.org/10.1111/j.1468-0335.2006.00508.x

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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