Bank Failures and Fiscal Austerity
AbstractThis 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 InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 00/90.
Date of creation: 01 May 2000
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Postal: International Monetary Fund, Washington, DC USA
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