Government Guarantees, Investment, and Vulnerability to Financial Crises
AbstractThe paper presents a new model of the East Asian crisis which combines three elements-moral hazard, investment collapse, and multiple equilibria-in a single account. The study locates the causes of the crisis in poor financial regulation, highly leveraged financial institutions, and implicit guarantees to the financial sector. The model has a unique long-run equilibrium with overinvestment. But in the short run, in which the capital stock is fixed, there may be multiple equilibria. In a crisis the government is forced to renege on its guarantees; the effect is a rapid reversal of foreign capital flows. Copyright Blackwell Publishing Ltd 2003.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Review of International Economics.
Volume (Year): 11 (2003)
Issue (Month): 5 (November)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576
Other versions of this item:
- Irwin, Gregor & Vines, David, 2000. "Government Guarantees, Investment And Vulnerability To Financial Crises," CEPR Discussion Papers 2652, C.E.P.R. Discussion Papers.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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