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Strategic Complementarities and the Twin Crises

  • Itay Goldstein
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    The economic literature emphasised the role of strategic complementarities in generating banking crises and currency crises. Motivated by evidence from recent financial crises, we study a model, where strategic complementarities exist, not only within a group of creditors or within a group of currency speculators, but also between the two groups. The additional type of complementarities generates a vicious circle between banking crises and currency crises. This magnifies the correlation between the two crises and destabilises the economy. We show that, due to the vicious circle, a Lender of Last Resort might not be able to prevent bank runs. Copyright 2005 Royal Economic Society.

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    Article provided by Royal Economic Society in its journal The Economic Journal.

    Volume (Year): 115 (2005)
    Issue (Month): 503 (04)
    Pages: 368-390

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    Handle: RePEc:ecj:econjl:v:115:y:2005:i:503:p:368-390
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    1. Miller, Victoria, 1998. "The Double Drain with a Cross-Border Twist: More on the Relationship between Banking and Currency Crises," American Economic Review, American Economic Association, vol. 88(2), pages 439-43, May.
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