Recent Advances in Neo-Schumpeterian Economics
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Recent Advances in Neo-Schumpeterian Economics

Essays in Honour of Horst Hanusch

Edited by Andreas Pyka, Uwe Cantner, Alfred Greiner and Thomas Kuhn

This judicious selection of recent essays demonstrates the applicability of the fundamental principles of neo-Schumpeterian economics, namely, innovation and uncertainty. The authors demonstrate how neo-Schumpeterian economics is developing into a comprehensive economic theory encompassing industry, the public sector and financial markets.
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Chapter 7: Corporate Currency Hedging and Currency Crises

Andreas Röthig, Willi Semmler and Peter Flaschel


* Andreas Röthig, Willi Semmler and Peter Flaschel 1. INTRODUCTION One of the key ingredients in financial crises according to Krugman (2000) is foreign-currency-denominated debt. Given such sort of debt, a sudden currency depreciation – a rising price of foreign exchange – could have serious consequences for the balance sheets of firms. Those negative balance-sheet effects may cancel out positive effects arising from the trade balance, as described by the Marshall-Lerner condition. Krugman (2000) sketches two possible solutions for avoiding financial crises. The first is based on a growing integration of markets for goods and services. This would weaken the contractionary balance-sheet effect of a currency depreciation and strengthen the positive effects on exports. The second solution concerns encouraging foreign direct investment. Multinational firms, which have subsidiaries in different countries and deal with a portfolio of different currencies, are more likely to resist pressures arising from a specific currency. Promoting foreign direct investment serves to reduce negative effects of adverse trends in foreign exchange markets. Hence both solutions focus on strengthening the independence of a firm’s balance sheet in respect of adverse exchange rate movements. This chapter pursues a new approach for reaching this objective. The main idea is that some independence of a firm’s balance sheet from adverse exchange rate movements can be achieved by corporate risk management. In contrast to our firm-based approach, other authors, such as Burnside et al. (2001), focus on the role of banks in currency crises. These authors investigate the conflict between government guarantees and banks’...

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