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Government Guarantees, Investment, and Vulnerability to Financial Crises

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  • Gregor Irwin
  • David Vines

Abstract

The paper presents a new model of the East Asian crisis which combines three elements-moral hazard, investment collapse, and multiple equilibria-in a single account. The study locates the causes of the crisis in poor financial regulation, highly leveraged financial institutions, and implicit guarantees to the financial sector. The model has a unique long-run equilibrium with overinvestment. But in the short run, in which the capital stock is fixed, there may be multiple equilibria. In a crisis the government is forced to renege on its guarantees; the effect is a rapid reversal of foreign capital flows. Copyright Blackwell Publishing Ltd 2003.

Suggested Citation

  • Gregor Irwin & David Vines, 2003. "Government Guarantees, Investment, and Vulnerability to Financial Crises," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 860-874, November.
  • Handle: RePEc:bla:reviec:v:11:y:2003:i:5:p:860-874
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    Cited by:

    1. Hesse, Heiko, 2007. "Monetary policy, structural break and the monetary transmission mechanism in Thailand," Journal of Asian Economics, Elsevier, pages 649-669.
    2. Vaugirard, Victor, 2007. "Bank bailouts and political instability," European Journal of Political Economy, Elsevier, vol. 23(4), pages 821-837, December.
    3. Ari, Ali, 2012. "Early warning systems for currency crises: The Turkish case," Economic Systems, Elsevier, vol. 36(3), pages 391-410.
    4. Hesse, Heiko, 2007. "Monetary policy, structural break and the monetary transmission mechanism in Thailand," Journal of Asian Economics, Elsevier, pages 649-669.
    5. Irina Bunda, 2005. "Un modèle de crises jumelles inspiré de la crise asiatique," Revue économique, Presses de Sciences-Po, vol. 56(4), pages 903-937.
    6. Irina Bunda, 2005. "Un modèle de crises jumelles inspiré de la crise asiatique," Post-Print halshs-00424464, HAL.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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