Banking crises in monetary economies
This paper analyzes the effect of inflation on banking crises in a model in which money and banks play essential roles. The model's equilibrium replicates some key features of actual banking crises, namely, the partial suspension of payments and the desire to hold cash even in the absence of pressing liquidity needs. When banks have access to a stable foreign currency, inflation has a threshold effect on banking crises: higher inflation reduces the likelihood of crises when inflation is below the threshold; the reverse happens when inflation exceeds the threshold. This result appears to be broadly consistent with available evidence.
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Volume (Year): 41 (2008)
Issue (Month): 1 (February)
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