Growth expectations and banking system fragility in developing economies
AbstractThe likelihood of a banking crisis appears to be higher in fast-developing countries. An explanation is provided in a Diamond and Dybvig framework, where banks are vehicles of consumption-smoothing, offering insurance against shocks to the consumption path of consumers. The theoretical model shows that the higher consumer growth expectations, the higher the optimal level of illiquidity insurance — even if it implies higher exposure bank runs. Empirical evidence supports this result and suggests that the effect of deposit interest rates on the probability of crisis is stronger after a period of high, uniterrupted growth. Policies of providing bail-outs or deposit insurance are demonstrated to be efficient even when they increase the fragility of the banking system.
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Bibliographic InfoPaper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 13/2005.
Length: 32 pages
Date of creation: 07 Nov 2005
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-07 (All new papers)
- NEP-BAN-2006-10-07 (Banking)
- NEP-DEV-2006-10-07 (Development)
- NEP-FDG-2006-10-07 (Financial Development & Growth)
- NEP-FMK-2006-10-07 (Financial Markets)
- NEP-MAC-2006-10-07 (Macroeconomics)
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