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Can Emerging Market Central Banks Bail Out Banks? A+L4848 Cautionary Tale From Latin America

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  • International Monetary Fund

Abstract

This paper investigates whether developing and emerging market countries can implement monetary policies similar to those used by advanced countries during the recent global crisis - injecting significant amounts of money into the financial system without facing major short-run adverse macroeconomic repercussions. Using panel data techniques, the paper analyzes episodes of financial turmoil in 16 Latin America during 1995-2007. The results show that developing and emerging market countries should be cautious because injecting money on a large scale into the financial system may fuel further macroeconomic instability, increasing the chances of simultaneous currency crises.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/258.

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Length: 30
Date of creation: 01 Nov 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/258

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Keywords: Financial stability; Banking sector; Developing countries; Emerging markets; Financial systems; Latin America; banking; central bank; banking crises; central banks; currency crises; bank money; bank claims; banking system; domestic currency; banking crisis; bank credit; banks ? balance sheets; bank restructuring; small bank; deposit insurance; balance of payments; private banks; foreign exchange market; excess liquidity; foreign exchange; public debt; currency crisis; external shocks; bank involvement; domestic currencies; debt crises; interbank market; banks ? solvency; bank assistance; macroeconomic stability; balance of payment crises; balance of payment; financial strength; crises episodes; bank credibility; bank loans; liquidity crises; public finances; crisis country; sovereign debt; sovereign debt crises; systemic bank restructuring; bank finance; bank law; bankruptcies; external shock; bank depositors; bank borrowers; bank regulators; currency board; bank reform; deposit guarantee; bank runs; interbank money market; bank of england; currency risk; bank mergers; banks ? assets; financial safety net; banks ? balance sheet; bank of japan; reserve currency;

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References

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  1. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  2. Evan Tanner, 2002. "Exchange Market Pressure, Currency Crises, and Monetary Policy," IMF Working Papers 02/14, International Monetary Fund.
  3. Ratna Sahay & Luis Felipe Céspedes & Paul Cashin, 2002. "Keynes, Cocoa, and Copper," IMF Working Papers 02/223, International Monetary Fund.
  4. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  5. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  6. Velasco, Andres, 1987. "Financial crises and balance of payments crises : A simple model of the southern cone experience," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 263-283, October.
  7. Y.Chen & K. Rogoff, 2003. "Commodity Currencies and Empirical Exchange Rate Puzzles," DNB Staff Reports (discontinued) 76, Netherlands Central Bank.
  8. Giovanni S.F. Bruno, 2004. "Approximating the Bias of the LSDV Estimator for Dynamic Unbalanced Panel Data Models," KITeS Working Papers 159, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jul 2004.
  9. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises," IMF Working Papers 10/146, International Monetary Fund.
  10. Steven Riess Weisbrod & Liliana Rojas-Suárez, 1995. "Financial Fragilities in Latin America," IMF Occasional Papers 132, International Monetary Fund.
  11. Marc Quintyn & David S. Hoelscher, 2003. "Managing Systemic Banking Crises," IMF Occasional Papers 224, International Monetary Fund.
  12. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  13. Morris Goldstein & Carmen M. Reinhart, 2000. "Assessing Financial Vulnerability: An Early Warning System for Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 100.
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Citations

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Cited by:
  1. Patrick A. Imam & Erlend Nier & Luis Ignacio Jácome, 2012. "Building Blocks for Effective Macroprudential Policies in Latin America," IMF Working Papers 12/183, International Monetary Fund.
  2. Judit Krekó & Csaba Balogh & Kristóf Lehmann & Róbert Mátrai & György Pulai & Balázs Vonnák, 2013. "International experiences and domestic opportunities of applying unconventional monetary policy tools," MNB Occasional Papers 2013/100, Magyar Nemzeti Bank (the central bank of Hungary).
  3. Kristóf Lehmann, 2012. "International experiences with unconventional central bank instruments," MNB Bulletin, Magyar Nemzeti Bank (the central bank of Hungary), vol. 7(2), pages 24-30, June.

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