Firm Liquidation and Economic Crisis under Unexpected Exchange Rate Shock

This paper studies the causes, mechanisms and consequences of decreasing firm value and welfare loss in an economy under a fixed exchange rate regime when there is an unexpected appreciation in domestic currency. We also study the possible economic crisis caused by the exchange rate shock. We consid...

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Main Authors:	Gong, Qiang, Jia, Shen, Lin, Justin Yifu
Format:	Journal Article
Language:	EN
Published:	2012
Subjects:	Firm Behavior: Theory D210 Foreign Exchange F310 Financing Policy Financial Risk and Risk Management Capital and Ownership Structure G320 Bankruptcy Liquidation G330
Online Access:	http://hdl.handle.net/10986/5790

id	okr-10986-5790
recordtype	oai_dc
spelling	okr-10986-57902021-04-23T14:02:23Z Firm Liquidation and Economic Crisis under Unexpected Exchange Rate Shock Gong, Qiang Jia, Shen Lin, Justin Yifu Firm Behavior: Theory D210 Foreign Exchange F310 Financing Policy Financial Risk and Risk Management Capital and Ownership Structure G320 Bankruptcy Liquidation G330 This paper studies the causes, mechanisms and consequences of decreasing firm value and welfare loss in an economy under a fixed exchange rate regime when there is an unexpected appreciation in domestic currency. We also study the possible economic crisis caused by the exchange rate shock. We consider the established production capacity as well as the training of firm specific labors before production to obtain that unexpected appreciation in domestic currency leads to unemployment of firm workers as well as a decrease in the firm's output and revenue. Furthermore, when the exchange rate appreciates to a certain degree, it is likely to induce economic crisis--firms will stop production completely which will not only decrease the firm's value, but also create a greater loss of social welfare due to the waste of existing capacity and human capital in the economy. Our study also implies that when an economy shifts from a fixed exchange rate regime to a more flexible one, government could adopt gradual reform policies and partial deregulation of the exchange rate to reduce or prevent social welfare loss when domestic currency faces appreciation pressure. 2012-03-30T07:34:33Z 2012-03-30T07:34:33Z 2009 Journal Article Annals of Economics and Finance 15297373 http://hdl.handle.net/10986/5790 EN http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Journal Article
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	EN
topic	Firm Behavior: Theory D210 Foreign Exchange F310 Financing Policy Financial Risk and Risk Management Capital and Ownership Structure G320 Bankruptcy Liquidation G330
spellingShingle	Firm Behavior: Theory D210 Foreign Exchange F310 Financing Policy Financial Risk and Risk Management Capital and Ownership Structure G320 Bankruptcy Liquidation G330 Gong, Qiang Jia, Shen Lin, Justin Yifu Firm Liquidation and Economic Crisis under Unexpected Exchange Rate Shock
relation	http://creativecommons.org/licenses/by-nc-nd/3.0/igo
description	This paper studies the causes, mechanisms and consequences of decreasing firm value and welfare loss in an economy under a fixed exchange rate regime when there is an unexpected appreciation in domestic currency. We also study the possible economic crisis caused by the exchange rate shock. We consider the established production capacity as well as the training of firm specific labors before production to obtain that unexpected appreciation in domestic currency leads to unemployment of firm workers as well as a decrease in the firm's output and revenue. Furthermore, when the exchange rate appreciates to a certain degree, it is likely to induce economic crisis--firms will stop production completely which will not only decrease the firm's value, but also create a greater loss of social welfare due to the waste of existing capacity and human capital in the economy. Our study also implies that when an economy shifts from a fixed exchange rate regime to a more flexible one, government could adopt gradual reform policies and partial deregulation of the exchange rate to reduce or prevent social welfare loss when domestic currency faces appreciation pressure.
format	Journal Article
author	Gong, Qiang Jia, Shen Lin, Justin Yifu
author_facet	Gong, Qiang Jia, Shen Lin, Justin Yifu
author_sort	Gong, Qiang
title	Firm Liquidation and Economic Crisis under Unexpected Exchange Rate Shock
title_short	Firm Liquidation and Economic Crisis under Unexpected Exchange Rate Shock
title_full	Firm Liquidation and Economic Crisis under Unexpected Exchange Rate Shock
title_fullStr	Firm Liquidation and Economic Crisis under Unexpected Exchange Rate Shock
title_full_unstemmed	Firm Liquidation and Economic Crisis under Unexpected Exchange Rate Shock
title_sort	firm liquidation and economic crisis under unexpected exchange rate shock
publishDate	2012
url	http://hdl.handle.net/10986/5790
_version_	1764396302992408576

Firm Liquidation and Economic Crisis under Unexpected Exchange Rate Shock

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