This study focuses on the 'hostage effect,' which enables a government to share the burden of crisis prevention with the private sector. In the most severe situations this mechanism turns out to be the only way for the government to mitigate the crisis. It is demonstrated that the crisis model accounting for the 'hostage effect' implies reversed logic of coordination. As a consequence, standard approaches to curing crises may produce results opposite to those predicted by common sense. We find in particular that the more reserves the government has in this model, the stronger is the adverse effect of the crisis. The sources of the 1998 financial crisis in Russia are discussed. We argue that some of the effects revealed by our model could contribute to the development of this crisis. The model can explain, for instance, the apparently adverse impact of loans provided by the IMF and the World Bank.
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Paper provided by EERC Research Network, Russia and CIS in its series EERC Working Paper Series with number
02-03e.
Length: 30 pages Date of creation: 28 Nov 2002 Date of revision: Handle: RePEc:eer:wpalle:02-03e
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Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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References listed on IDEAS 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.:
Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 2002.
"The Role of Large Players in Currency Crises,"
NBER Chapters,
in: Preventing Currency Crises in Emerging Markets, pages 197-268
National Bureau of Economic Research, Inc.
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