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Lending of First versus Lending of Last Resort: The Bulgarian Financial Crisis of 1996/19971

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  • Michael Berlemann

    ()
    ([1] ifo Institute for Economic Research, Branch Dresden, Einsteinstrasse 3, D-01069 Dresden, Germany [2] Dresden University of Technology, Dresden, Germany.)

  • Nikolay Nenovsky

    ([1] 3Bulgarian National Bank, Sofia, Bulgaria [2] 4University of National and World Economy, Sofia, Bulgaria [3] 5Universit� d'Orl�ans, Orl�ans, France)

Abstract

In 1996/1997 Bulgaria was hit by a severe financial crisis, spreading from a banking crisis to a currency crisis. We argue that the Bulgarian Financial Crisis might serve as an illustrative example of a twin crisis involving both a currency and a banking crisis. While the Bulgarian Crisis had some properties of the so-called fundamental crises, as explained by first-generation models of currency crises, the severity of the crisis was primarily (but not only) due to systematic and path-dependent moral hazard behaviour of the banking sector. Special attention is paid to the crucial role the Bulgarian National Bank played in the pre-crisis and crisis periods when acting more as a lender of first resort rather than a lender of last resort (LOLR). We also show how Bulgaria managed to overcome the crisis by introducing a second-generation currency board allowing the central bank to act strictly as a limited LOLR, thereby making the country less prone to a financial crisis in the future. Comparative Economic Studies (2004) 46, 245–271. doi:10.1057/palgrave.ces.8100028

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Comparative Economic Studies.

Volume (Year): 46 (2004)
Issue (Month): 2 (June)
Pages: 245-271

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Handle: RePEc:pal:compes:v:46:y:2004:i:2:p:245-271

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Cited by:
  1. Hielscher, Kai & Markwardt, Gunther, 2012. "The role of political institutions for the effectiveness of central bank independence," European Journal of Political Economy, Elsevier, vol. 28(3), pages 286-301.
  2. Mark Mietzner & Dirk Schiereck, 2011. "Staatsfonds als Ankerinvestoren: Eine Note zum Einstieg von Aabar bei Daimler," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 12(1), pages 92-100, 02.
  3. Alexandru Minea & Christophe Rault, 2011. "External Monetary Shocks and Monetary Integration: Evidence from the Bulgarian Currency Board," CESifo Working Paper Series 3409, CESifo Group Munich.
  4. Nikolay Nenovsky, 2010. "Monetary Regimes In Post-Communist Countries Some Long-Term Reflections," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 57, pages 217-234, november.
  5. Nikolay Nenovsky & Gergana Mihaylova, 2007. "Dynamics of the Financial Wealth of the Institutional Sectors in Bulgaria for the Period 1990 – 2005," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 72-92.
  6. Kiril Tochkov & Nikolay Nenovsk, 2010. "Institutional Reforms, EU Accession, and Bank Efficiency: Evidence from Bulgaria," Working Papers 201005, Texas Christian University, Department of Economics.

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