Balance SHeet Effects, Bailout Guarantees and Financial Crises / Martin Schneider, Aaron Tornell.

Format:

Book

Author/Creator:

Schneider, Martin.

Contributor:

National Bureau of Economic Research.

Tornell, Aaron.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8060.

NBER working paper series no. w8060

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2000.

Summary:

Several recent twin' currency and banking crises were preceded by lending booms during which the banking system financed rapid growth of the nontradable (N) sector by borrowing in foreign currency. They were followed by recessions during which a sharp decline in credit especially hurt the N-sector. This paper presents a model that accounts for these stylized facts. A crucial element is that we model a banking system that is simultaneously subject to two distortions typical of international credit markets: bailout guarantees and the imperfect enforceability of contracts. The interaction of these distortions produces unusually fast N-sector growth, together with a real appreciation, during the boom. However, it is also responsible for self-fulfilling twin crises, which have persistent adverse effects on N-sector output.

Notes:

Print version record

December 2000.