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Balance Sheet Effects, Bailout Guarantees and Financial Crises

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Author Info
MARTIN SCHNEIDER
AARON TORNELL

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Abstract

This paper provides a model of boom-bust episodes in middle-income countries. It is based on sectoral differences in corporate finance: the nontradables sector is special in that it faces a contract enforceability problem and enjoys bailout guarantees. As a result, currency mismatch and borrowing constraints arise endogenously in that sector. This sectoral asymmetry allows the model to replicate the main features of observed boom-bust episodes. In particular, episodes begin with a lending boom and a real appreciation, peak in a self-fulfilling crisis during which a real depreciation coincides with widespread bankruptcies, and end in a recession and credit crunch. The nontradables sector accounts for most of the volatility in output and credit. Copyright 2004 The Review of Economic Studies Ltd.

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Article provided by Blackwell Publishing in its journal The Review of Economic Studies.

Volume (Year): 71 (2004)
Issue (Month): (07)
Pages: 883-913
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Handle: RePEc:bla:restud:v:71:y:2004:i::p:883-913

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Aaron Tornell, 1999. "Common Fundamentals in the Tequila and Asian Crises," NBER Working Papers 7139, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. " Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-58, December. [Downloadable!] (restricted)
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  3. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," Working Paper 98-10, Federal Reserve Bank of Atlanta. [Downloadable!]
  4. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2000. "Capital Markets and the Instability of Open Economies," Working Papers 99.01 update, Swiss National Bank, Study Center Gerzensee. [Downloadable!]
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  5. Chang, R. & Velasco, A., 1998. "Financial Crises in Emerging Markets: A Canonical Model," Working Papers 98-21, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  6. Kenneth Kasa, 1998. "Borrowing constraints and asset market dynamics: evidence from the Pacific Basin," Economic Review, Federal Reserve Bank of San Francisco, pages 17-28. [Downloadable!]
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  7. McKinnon, Ronald I. & Pill, Huw, 1998. "International Overborrowing: A Decomposition of Credit and Currency Risks," World Development, Elsevier, vol. 26(7), pages 1267-1282, July. [Downloadable!] (restricted)
  8. Ronald I. McKinnon & Huw Pill, 1998. "International Overborrowing: A Decomposition of Credit and Currency Risks," Working Papers 98004, Stanford University, Department of Economics. [Downloadable!]
  9. Maurice Obstfeld, 1986. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Burnside, A Craig & Eichenbaum, Martin & Rebelo, Sérgio, 2000. "On the Fundamentals of Self-Fulfilling Speculative Attacks," CEPR Discussion Papers 2565, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
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  12. Cole, Harold L & Kehoe, Timothy J, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Blackwell Publishing, vol. 67(1), pages 91-116, January.
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  13. Drazen, Allan & Helpman, Elhanan, 1990. "Inflationary Consequences of Anticipated Macroeconomic Policies," Review of Economic Studies, Blackwell Publishing, vol. 57(1), pages 147-64, January. [Downloadable!] (restricted)
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