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Bank Failures and Fiscal Austerity

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  • Andrew Feltenstein

Abstract

This work employs a dynamic general equilibrium model to evaluate the causes and implications of bank insolvencies. The model is applied to stylized data from several South Asian countries. It derives conclusions about policy instruments designed to alleviate the impact of insolvencies. Firms are subject to intertemporal solvency conditions, and the public withdraws deposits when borrowers default. If banks optimize by restricting credit to risky borrowers, these failures can be partially avoided. Numerical simulations conclude that the combination of compensating monetary policy and restrictive fiscal policy offers the best way of responding to a bank crisis caused by exogenous shocks.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 00/90.

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Length: 30
Date of creation: 01 May 2000
Date of revision:
Handle: RePEc:imf:imfwpa:00/90

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Related research

Keywords: Banking; Developing countries; Economic models; banking system; monetary policy; bank behavior; bank assets; inflation; terms of trade; bank failures; terms of trade shock; price level; present value; banking sector; bank deposits; rate of inflation; real interest rate; foreign currency; bank crisis; bank panics; monetary base; bank insolvency; open market operation; bank insolvencies; dollar value; savings rate; banking practices; bankrupt firm; bankrupt; private banking; bank solvency; aggregate demand; rational expectations; monetary aggregate; higher rate of inflation; bank lending; savings behavior; bank run; bank soundness; bank panic; banking model; inflation rate; nominal interest rates; bank capital; bank staff; money supply; nominal interest rate; bank regulations;

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