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 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.

Bibliographic Details

Main Authors:	Gong, Qiang, Jia, Shen, Lin, Justin Yifu
Format:	Journal Article biblioteca
Language:	EN
Published:	2009
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
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