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Original Sin, Balance Sheet Crises, and the Roles of International Lending

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Author Info

  • Jeromin Zettelmeyer
  • Olivier Jeanne

Abstract

We present a stylized framework which encompasses a variety of "balance sheet approaches" to currency crises that have been suggested in the literature, and analyze their policy implications. The common theme is that currency and maturity mismatches in private sector balance sheets constrain the capacity of monetary and fiscal policies to deal with self-fulfilling capital account crises, and generate a role for international crisis lending. International lending could be used to back domestic last-resort lending to banks, or to loosen fiscal constraints. Provided they have a sound fiscal position in normal times, this can make countries immune to self-fulfilling crises.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/234.

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Length: 27
Date of creation: 01 Dec 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/234

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Related research

Keywords: Exchange rate regimes; Dollarization; exchange rate; exchange rates; crisis lending; exchange rate expectations; bank runs; international crisis lending; currency crises; international crisis; bank run; banking crises; financial crises; banking crisis; exchange rate regime; exchange rate level; exchange rate function; recapitalization; insolvent ? banks; international financial crises; real exchange rate; financial crisis; economic crisis; deposit insurance; large-scale crisis lending; insolvent banks; exchange rate policy; flexible exchange rate regimes; flexible exchange rates; exchange reserves; flexible exchange rate; equilibrium exchange rate; nominal exchange rate; exchange rate depreciations; floating exchange rate; floating exchange rate regime; exchange rate flexibility; capital mobility; currency crisis; nominal exchange rates; current exchange rates; foreign exchange; asian currency crisis; fixed exchange rate regimes; bank crisis; fixed exchange rate; asian crisis; exchange rate pass; pre-crisis; exchange rate depreciation; foreign exchange reserves;

References

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  1. Burnside, A Craig & Eichenbaum, Martin & Rebelo, Sérgio, 1999. "Hedging and Financial Fragility in Fixed Exchange Rate Regimes," CEPR Discussion Papers 2171, C.E.P.R. Discussion Papers.
  2. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November.
  3. Martin Schneider & Aaron Tornell, 2004. "Balance Sheet Effects, Bailout Guarantees and Financial Crises," Review of Economic Studies, Wiley Blackwell, vol. 71, pages 883-913, 07.
  4. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "Paper tigers?: A model of the Asian crisis," European Economic Review, Elsevier, vol. 43(7), pages 1211-1236, June.
  5. Lawrence J. Christiano & Christopher Gust & Jorge Roldos, 2002. "Monetary policy in a financial crisis," Working Paper 0204, Federal Reserve Bank of Cleveland.
  6. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  7. Olivier Jeanne & Charles Wyplosz, 2001. "The International Lender of Last Resort: How Large is Large Enough?," NBER Working Papers 8381, National Bureau of Economic Research, Inc.
  8. Aguiar, Mark, 2005. "Investment, devaluation, and foreign currency exposure: The case of Mexico," Journal of Development Economics, Elsevier, vol. 78(1), pages 95-113, October.
  9. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  10. Olivier Jeanne, 2001. "The International Lender of Last Resort," IMF Working Papers 01/76, International Monetary Fund.
  11. Philippe Bacchetta, 2000. "Monetary Policy with Foreign Currency Debt," Working Papers 00.03, Swiss National Bank, Study Center Gerzensee.
  12. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  13. Brad Setser & Nouriel Roubini & Christian Keller & Mark Allen & Christoph B. Rosenberg, 2002. "A Balance Sheet Approach to Financial Crisis," IMF Working Papers 02/210, International Monetary Fund.
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Citations

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Cited by:
  1. repec:hal:journl:halshs-00111153 is not listed on IDEAS
  2. Frankel, Jeffrey, 2005. "Contractionary Currency Crashes In Developing Countries," Working Paper Series rwp05-017, Harvard University, John F. Kennedy School of Government.
  3. repec:hal:cesptp:halshs-00111153 is not listed on IDEAS
  4. Mario Draghi & Francesco Giavazzi & Robert C. Merton, 2003. "Transparency, Risk Management and International Financial Fragility," NBER Working Papers 9806, National Bureau of Economic Research, Inc.
  5. Javier Gómez Pineda, . "Capital Flows and Monetary Policy," Borradores de Economia 395, Banco de la Republica de Colombia.
  6. Besancenot, Damien & Vranceanu, Radu, 2004. "Excessive Liability Dollarization in a Simple Signaling Model," ESSEC Working Papers DR 04001, ESSEC Research Center, ESSEC Business School.
  7. Agliardi, Elettra & Agliardi, Rossella & Pinar, Mehmet & Stengos, Thanasis & Topaloglou, Nikolas, 2012. "A new country risk index for emerging markets: A stochastic dominance approach," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 741-761.
  8. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 1. Drivers of Systemic Banking Crises: The Role of Bank-Balance-Sheet Contagion and Financial Account Structure," OECD Economics Department Working Papers 902, OECD Publishing.
  9. Daianu, Daniel & Kallai, Ella, 2008. "Disinflation and Inflation Targeting in Romania," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 5(1), pages 59-81, March.
  10. Javier Guillermo Gómez, 2006. "Capital Flows and Monetary Policy," BORRADORES DE ECONOMIA 002097, BANCO DE LA REPÚBLICA.
  11. Jose Luiz Rossi Junior, 2004. "Foreign Exchange exposure, corporate financial policies and the exchange rate regime: Evidence from Brazil," Econometric Society 2004 Latin American Meetings 163, Econometric Society.
  12. Metin-Özcan, Kıvılcım & Us, Vuslat, 2007. "Dedollarization in Turkey after decades of dollarization: A myth or reality?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 385(1), pages 292-306.
  13. Vincent Bouvatier, 2006. "Hot money inflows in China : How the people's bank of China took up the challenge," Cahiers de la Maison des Sciences Economiques bla06011, Université Panthéon-Sorbonne (Paris 1).
  14. Axel Lindner, 2006. "Original Sin - Analysing Its Mechanics and a proposed Remedy in a Simple Macroeconomic Model," IWH Discussion Papers 11, Halle Institute for Economic Research.

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