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Short-Term Debt in International Banking Crises

Author

Listed:
  • Eunsook Seo

    (SangMyung University)

Abstract

This paper explores how a bank run can occur when a bank takes into account short-term capital inflow from abroad. My model is an extension of the Diamond-Dybvig model to include the possibility that short-term liquidity needs can be met by borrowing from abroad. In the model, it is more efficient to meet short-term liquidity needs this way than by holding liquid domestic assets. I show conditions under which a ��bad�� equilibrium exists in which pessimistic foreign investors withhold their investments, making a bank run the equilibrium strategy for domestic agents and making those expectations self-fulfilling.

Suggested Citation

  • Eunsook Seo, 2008. "Short-Term Debt in International Banking Crises," Korean Economic Review, Korean Economic Association, vol. 24, pages 131-150.
    • Handle: RePEc:kea:keappr:ker-20080630-24-1-05
    as

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    File URL: http://keapaper.kea.ne.kr/RePEc/kea/keappr/KER-20080630-24-1-05.pdf
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    References listed on IDEAS

    as
    1. Cooper,Russell, 1999. "Coordination Games," Cambridge Books, Cambridge University Press, number 9780521578967, January.
    2. Chang, Roberto & Velasco, Andres, 2000. "Banks, debt maturity and financial crises," Journal of International Economics, Elsevier, vol. 51(1), pages 169-194, June.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    4. Freeman, Scott, 1988. "Banking as the Provision of Liquidity," The Journal of Business, University of Chicago Press, vol. 61(1), pages 45-64, January.
    5. Cooper, Russell & Ross, Thomas W., 1998. "Bank runs: Liquidity costs and investment distortions," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 27-38, February.
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    More about this item

    Keywords

    Short-term borrowing; Bank runs; Multiple equilibria; Self-fulfilling expectations;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G2 - Financial Economics - - Financial Institutions and Services

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