Bank runs, foreign exchange reserves and credibility: When size does not matter
The paper considers the sizes of banking sectors that are vulnerable to runs when the central bank cares about economic stability and currency peg credibility. It is shown that when banks are small, the central bank will recapitalize unhealthy banks because doing so will not compromise its peg. While recapitalizations of large banking sectors will compromise a peg, central banks will also bailout large banking sectors in distress to prevent great economic instability. Given the central bank's expected response, a range of sizes for banking systems, which are vulnerable to runs, is found along with a condition in which size will not matter. That is, if that condition is satisfied, banking sectors of all sizes will be immune to runs. The experiences of Asia and Argentina are discussed to provide anecdotal support for the model.
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Volume (Year): 18 (2008)
Issue (Month): 5 (December)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Banks, Liquidity Crises and Economic Growth,"
DEGIT Conference Papers
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- Sachs, Jeffrey & Tornell, Aaron & Velasco, Andres, 1995. "The Collapse of the Mexican Peso: What Have We Learned?," Working Papers 95-22, C.V. Starr Center for Applied Economics, New York University.
- Miller, Victoria, 2000. "Central bank reactions to banking crises in fixed exchange rate regimes," Journal of Development Economics, Elsevier, vol. 63(2), pages 451-472, December.
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