When Bad Things Happen to Good Banks: Contagious Bank Runs and Currency Crises
AbstractThe author develops a twin crisis model featuring multiple banks. At each bank, domestic and foreign depositors play a banking game. This game has a run and a no-run equilibrium. Bank failures drain reserves in addition to those drained when foreign agents convert domestic currency to foreign. The fixed exchange rate collapses if a threshold number of banks fail. Agents observe sunspots to aid their equilibrium selection. The numerical solution matches somewhat the Turkish financial sector prior to the crisis of 2001. The Turkish exchange rate appears to have exposed the financial system to a 10 per cent risk of collapse.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 04-18.
Length: 39 pages
Date of creation: 2004
Date of revision:
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Exchange rates; Financial institutions;
Find related papers by JEL classification:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F30 - International Economics - - International Finance - - - General
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-23 (All new papers)
- NEP-FIN-2004-08-23 (Finance)
- NEP-IFN-2004-08-23 (International Finance)
- NEP-MON-2004-08-23 (Monetary Economics)
- NEP-SEA-2004-08-23 (South East Asia)
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