2.2 Implications for the exchange rate
Our model so far has dealt exclusively with the e!ect of a loss of con"dence on
the value of a single "rm. Aggregating similar "rms to create an economy-wide
collapse of "rms' values is straightforward. We can also reasonably assume that
foreign investors and many domestic investors care about returns in dollars. We
then have the result that a fall in R, which is now a loss of con"dence about
returns in dollars, can trigger a fall in "rms' values in dollars (i.e., the value of the
stock market in dollar terms). Note that "rms' values could fall sharply, even if
there is not much actual stealing, because the value of "rms' to outsiders is
determined by expected expropriation.