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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;

References

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  1. Philippe Bacchetta, 2000. "Monetary Policy with Foreign Currency Debt," Working Papers 00.03, Swiss National Bank, Study Center Gerzensee.
  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. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2001. "Hedging and financial fragility in fixed exchange rate regimes," European Economic Review, Elsevier, vol. 45(7), pages 1151-1193.
  4. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper Tigers? A Model of the Asian Crisis," NBER Working Papers 6783, National Bureau of Economic Research, Inc.
  5. 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.
  6. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  7. Lawrence J. Christiano & Christopher Gust & Jorge Roldos, 2002. "Monetary policy in a financial crisis," Working Paper Series WP-02-05, Federal Reserve Bank of Chicago.
  8. Jeanne, Olivier & Wyplosz, Charles, 2001. "The International Lender of Last Resort: How Large is Large Enough?," CEPR Discussion Papers 2842, C.E.P.R. Discussion Papers.
  9. 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.
  10. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  11. 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.
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Citations

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Cited by:
  1. Jeffrey A. Frankel, 2005. "Contractionary Currency Crashes in Developing Countries," NBER Working Papers 11508, National Bureau of Economic Research, Inc.
  2. 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.
  3. Javier Guillermo Gómez, 2006. "Capital Flows and Monetary Policy," BORRADORES DE ECONOMIA 002097, BANCO DE LA REPÚBLICA.
  4. 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).
  5. Javier Gómez Pineda, . "Capital Flows and Monetary Policy," Borradores de Economia 395, Banco de la Republica de Colombia.
  6. Vincent Bouvatier, 2006. "Hot Money Inflows in China : How the People's Bank of China Took up the Challenge," Post-Print halshs-00111153, HAL.
  7. 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.
  8. Besancenot, Damien & Vranceanu, Radu, 2004. "Excessive Liability Dollarization in a Simple Signaling Model," ESSEC Working Papers DR 04001, ESSEC Research Center, ESSEC Business School.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. 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.

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