Dai, Meixing (2010): External constraint and financial crises with balance sheet effects.
Download (235kB) | Preview
This paper investigates the dynamic implications of Krugman’s (1999) model of financial crises with balance-sheet effects, which has a considerable impact on the literature as well as the teaching of international financial crisis. By explicitly taking account of wealth accumulation and external equilibrium condition, it is shown that a financial crisis in emerging market economies, instead of being interpreted as a jump from a good to a bad equilibrium with zero investment and zero foreign debt, could be explained as a jump from an unstable dynamic trajectory to a stable one. The dynamic framework illustrates well the analysis of different factors at the origin of financial vulnerability and crisis. By discriminating the financial crises according to the severity of their negative impacts on the domestic economy, the present study also adds some insights in the analysis of policy implications.
|Item Type:||MPRA Paper|
|Original Title:||External constraint and financial crises with balance sheet effects|
|Keywords:||Financial crisis, currency crisis, balance sheet effect, external solvency constraint.|
|Subjects:||F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems
F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
|Date Deposited:||25. Mar 2010 06:11|
|Last Modified:||15. Feb 2013 14:45|
Aghion, Philippe, Philippe Bacchetta and Abhijit Banerjee (2001), “Currency crises and monetary policy in an economy with credit constraints,” European Economic Review, Vol. 45, Iss. 7, 1121-50.
Aghion, Philippe, Philippe Bacchetta, and Abhijit Banerjee (2004a), “A Corporate Balance-Sheet Approach to Currency Crises,” Journal of Economic Theory 119, 6-30.
Aghion, Philippe, Philippe Bacchetta, and Abhijit Banerjee (2004b), “Financial Development and the Instability of Open Economies,” Journal of Monetary Economics 51, 1077-106.
Allen, M., C. Rosenberg, C. Keller and B. Setser (2002), “A Balance Sheet Approach to Financial Crisis,” IMF Working Paper, WP/02/210.
Allen, Roy E. (eds.) (2004), The Political Economy of Financial Crises, Edward Elgar Publishing.
Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon (1999), “The Financial Accelerator in a Quantitative Business Cycle Framework.” In J. B. Taylor & M. Woodford (eds.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, 1341-93, Elsevier.
Bordo, Michael D., Christopher M. Meissner, David Stuckler, (2010) Foreign currency debt, financial crises and economic growth: A long-run view, Journal of International Money and Finance, In Press.
Buiter, Willem and Anne Sibert (2009), “The collapse of Iceland’s banks: the predictable end of a non-viable business model”, in The First Global Financial Crisis of the 21st Century, pp. 23-26.
Chang, Roberto, and Andres Velasco (2001), “A Model of Financial Crises in Emerging Markets,” Quarterly Journal of Economics, Vol. 116, Iss. 2, 489-517.
Corsetti, Giancarlo, Paolo Pesenti, and Nouriel Roubini. (1999). “Paper Tigers? A Model of the Asian Crisis.” European Economic Review, v. 43, iss. 7, 1211-36.
Danielsson, Jon (2009), “The first casualty of the crisis: Iceland, in The First Global Financial Crisis of the 21st Century”, in The First Global Financial Crisis of the 21stCentury, pp. 9-13.
Eichengreen, Barry and Ricardo Hausmann (1999), “Exchange Rates and Financial Fragility”, Paper presented at the symposium New Challenges for Monetary Policy, 26 to 28 August, Jackson Hole, WY.
Eichengreen, Barry, Ricardo Hausmann, and Ugo Panizza (2005a), “The Pain of Original Sin ,” in Barry Eichengreen and Ricardo Hausmann (eds.), Other People's Money, Chicago University Press.
Eichengreen, Barry, Ricardo Hausmann, and Ugo Panizza (2005b), “The Mystery of Original Sin,” in Barry Eichengreen and Ricardo Hausmann (eds.), Other People's Money, Chicago University Press.
Flood, Robert, and Peter Garber. (1984). “Collapsing Exchange Rate Regimes: Some Linear Examples.” Journal of International Economics 17, 1-13.
Gandolfo, Giancarlo (2002), Internatinal finance and open-economy macroeconomics, Springer.
Hausmann, Ricardo (1999), “Should there be five currencies or 105?” Foreign Policy (Fall).
Hong, K. and Tornell, A. (2005), “Recovery from a currency crisis: some stylized facts” Journal of Development Economics, 76 (1), 71-96.
Isard, Peter, Assaf Razin and Andreaw H. Rose (eds.) (2000), International Finance and Financial Crises: Essays in Honour of Robert P. Flood, Jr., Springer.
Kim, Yoonbai and Yung-Hsiang Ying (2007), “An empirical assessment of currency devaluation in East Asian countries,” Journal of International Money and Finance, Volume 26, Issue 2, March 2007, Pages 265-283.
Krugman, Paul (1979), “A Model of Balance-of-Payments Crises,” Journal of Money, Credit, and Banking 11, 311–25.
Krugman, Paul (1999), “Balance Sheets, the Transfer Problem, and Financial Crises,” International Tax and Public Finance, vol. 6(4), 459-72.
Krugman, Paul (2010), “Crises,” Nobel Lecture at the annual meetings of the American Economic Association, Atlanta.
Kwack, Sung Yeung (2000), “An empirical analysis of the factors determining the financial crisis in Asia,” Journal of Asian Economics, Vol. 11, Iss. 2, 195-206.
Masson, Paul (1999), “Contagion: macroeconomic models with multiple equilibria,” Journal of International Money and Finance, vol. 18(4), 587-602.
Mendoza , E.G. (2002), “Credit, prices, and crashes business cycles with a sudden stop,” in: S. Edwards and J.A. Frankel, Editors, Preventing Currency Crises in Emerging Markets, University of Chicago Press, Chicago (2002), 335-83.
Merton, Miller (1998), “Asian financial crisis,” Japan and the World Economy, Vol. 10, Iss. 3, 355-358.
Obstfeld, M. (1994), “The Logic of Currency Crises,” Cahiers économique et monétaire 43, 189–212.
Sachs, Jeffrey D., Tornell, Aaron and Velasco, Andres (1996), “The Mexican Peso Crisis: Sudden Death or Death Foretold?” Journal of international economics 41, 265-83.
Schmitt-Grohé, S., Uribe, M. (2003), “Closing Small Open Economy Models”, Journal of International Economics, Vol. 61, 163-85.
Schneider, Martin and Aaron Tornell (2004), “Balance Sheet Effects, Bailout Guarantees and Financial Crises,” Review of Economic Studies vol. 71, 883-913.
Sirtaine, Sophie & Skamnelos, Ilias (2007), “Credit growth in emerging Europe: a cause for stability concerns?” Policy Research Working Paper Series 4281, The World Bank.
Stokes, M., 2009. Eastern Europe: on crisis watch Roubini global monitor. http://www.roubini.com /euro-monitor/255488/eastern_europe__on_crisis_watch.
Upadhyaya, K.P., Upadhyaya, M.P. (1999), “Output effects of devaluation: evidence from Asia,” Journal of Development Studies 35 (6), 89-103.
Von Hagen, Jurgen and Siedschlag, Iulia (2008), “Managing Capital Flows: Experiences from Central and Eastern Europe,” Economic and Social Research Institute (ESRI), Papers WP234.