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Bank runs, political distortions and contagion

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  • Victor Vaugirard

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    (TEAM-CNRS University of Paris at Sorbonne)

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    Abstract

    This paper highlights the spread of banking panics across countries, as the public reassesses governments' propensity to bailouts. Policymakers decide whether to rescue a failing banking sector, by weighing the costs of a collapse against the costs associated with raising taxes to finance a bailout package. The former involve social costs for the society and personal costs for policymakers. In addition, they have an informational advantage over creditors regarding the costs of bank liquidation. A crisis in a country leads lenders to reexamine policymakers'' willingness to intervene in other countries, which eventually makes their banks more vulnerable to self-fulfilling depositors'' runs.

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    File URL: http://www.accessecon.com/pubs/EB/2004/Volume6/EB-04F30009A.pdf
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    Bibliographic Info

    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 6 (2004)
    Issue (Month): 18 ()
    Pages: 1-10

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    Handle: RePEc:ebl:ecbull:eb-04f30009

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    1. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    2. Victor E. Vaugirard, 2004. "Informational Contagion of Sudden Stops in a Global Games Framework," Open Economies Review, Springer, vol. 15(2), pages 169-192, 04.
    3. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
    4. Masson, Paul, 1999. "Contagion:: macroeconomic models with multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 587-602, August.
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