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Sovereign liquidity crises: analytics and implications for public policy

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Author Info
Michael Chui
Prasanna Gui
Andrew G Haldane
Abstract

This paper offers an analytical framework with which to assess some recent proposals for strengthening the international financial architecture. A model is developed of sovereign liquidity crises that reflect two sources of financial stress - weak fundamentals and self-fulfilling expectations. The nature of the underlying co-ordination game is investigated, as are the properties of the unique equilibrium. In so doing, the paper characterises the welfare costs of belief-driven crises, which are found to be potentially significant. Some recent policy proposals are also evaluated, including prudent debt and liquidity management, capital controls, greater information disclosure, and the efficacy of monetary policy tightening in the midst of crisis.

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Paper provided by Bank of England in its series Bank of England working papers with number 121.

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Handle: RePEc:boe:boeewp:121

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
    • Eaton, Jonathan & Gersovitz, Mark & Stiglitz, Joseph E., 1986. "The pure theory of country risk," European Economic Review, Elsevier, vol. 30(3), pages 481-513, June. [Downloadable!] (restricted)
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  6. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November. [Downloadable!] (restricted)
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  13. Fischer, Stanley, 1999. "Reforming the International Financial System," Economic Journal, Royal Economic Society, vol. 109(459), pages F557-76, November. [Downloadable!] (restricted)
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  15. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April. [Downloadable!] (restricted)
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  20. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998-2), pages 1-136. [Downloadable!]
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  1. Christina E. Bannier, 2003. "Private and Public Information in Self-Fulfilling Currency Crises," International Finance 0309006, EconWPA. [Downloadable!]
  2. Axel Dreher & Bernhard Herz & Volker Karb, 2004. "Is There a Causal Link between Currency and Debt Crises?," International Finance 0404005, EconWPA, revised 16 Feb 2005. [Downloadable!]
    Other versions:
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