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Bank runs in open economies and the international transmission of panics

  • Garber, Peter M.
  • Grilli, Vittorio U.

In this paper, we extend the bank run literature to an open economy model. We show that a foreign banking system, by raising deposit rates in the presence of a domestic banking panic, may generate sufficient liquid resources to acquire assets sold by the domestic banking system at bargain prices. In this case, foreign depositors will benefit from the domestic panic. We also show that our simple model is able to generate the spreading of panics. Perhaps not surprisingly, the crucial element in determining the propagation of financial crises is the effect of interest rates on savings decisions.

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File URL: http://www.sciencedirect.com/science/article/B6V6D-45KNK51-29/2/ad206d405f809ad66a55c58a7410d13a
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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 27 (1989)
Issue (Month): 1-2 (August)
Pages: 165-175

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Handle: RePEc:eee:inecon:v:27:y:1989:i:1-2:p:165-175
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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  1. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
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