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Credits, Crises, and Capital Controls: A Microeconomic Analysis

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Author Info
Zvika Neeman ()
Gerhard O. Orosel ()

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Abstract

We analyze the behavior of foreign banks who sequentially provide credit to finance projects in an emerging market. The foreign banks are exposed to both micro-economic risks and the macro-economic risk of a currency crisis, and there are no bailout guarantees. Nevertheless, we show that it is often the case that banks provide too much credit too easily and that this behavior may precipitate the onset of a currency crisis. We demonstrate how the imposition of capital controls in the form of taxes and subsidies on foreign investment may improve the situation. Whereas most of the literature explains currency crises as the consequence of causes that lie within the debtor countries, the general message of our paper may be interpreted as placing part of the blame on the international financial community as well.

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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0103.

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Date of creation: Jan 2001
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Handle: RePEc:vie:viennp:0103

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Web page: http://www.univie.ac.at/vwl

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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