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External constraint and financial crises with balance sheet effects

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  • Dai, Meixing

Abstract

This paper investigates the dynamic implications of Krugman’s (1999) model of financial crises with balance-sheet effects, which has a considerable impact on the literature as well as the teaching of international financial crisis. By explicitly taking account of wealth accumulation and external equilibrium condition, it is shown that a financial crisis in emerging market economies, instead of being interpreted as a jump from a good to a bad equilibrium with zero investment and zero foreign debt, could be explained as a jump from an unstable dynamic trajectory to a stable one. The dynamic framework illustrates well the analysis of different factors at the origin of financial vulnerability and crisis. By discriminating the financial crises according to the severity of their negative impacts on the domestic economy, the present study also adds some insights in the analysis of policy implications.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21625.

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Date of creation: 24 Mar 2010
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Handle: RePEc:pra:mprapa:21625

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Keywords: Financial crisis; currency crisis; balance sheet effect; external solvency constraint.;

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Cited by:
  1. Meixing Dai, 2009. "Models of currency crises with self-fulfilling features: A comment," Working Papers of BETA 2009-14, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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