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Exchange-Rate-Based Stabilization: A Model of Financial Fragility

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  • Mr. Yuri V Sobolev

Abstract

Interactions between banks and open capital account are investigated as rationalizations for empirical regularities characterizing disinflation programs anchored by the exchange rate. The financial system is characterized by bank dominance and lending externality – banks do not internalize the effect of their lending on other banks’ information about potential borrowers. Model dynamics simulation shows that remonetization in the wake of disinflation increases loanable funds supply and translates into bank credit expansion financed by capital inflows. A credit-driven boom results, accompanied by overvaluation and current account deficits generating financial fragilities and vulnerability to a shock that can trigger banking and balance-of-payments crises.

Suggested Citation

  • Mr. Yuri V Sobolev, 2000. "Exchange-Rate-Based Stabilization: A Model of Financial Fragility," IMF Working Papers 2000/122, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2000/122
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    Cited by:

    1. Momchil Tikov, 2004. "Key Factors for the Stability of the Financial System," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 52-71.

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