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Aftermath of banking crises: Effects on real and monetary variables

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  • Gupta, Poonam

Abstract

In this paper a simple optimizing model is developed to analyze the implications of a banking crisis. Banks are incorporated by assuming that they intermediate funds between firms and households. It is shown that when depositors perceive the quality of deposits to have deteriorated, they switch from deposits to cash. Because of the higher cost of liquidity, consumption, M2 and the M2 multiplier decline, interest rates on deposits and loans increase and output contracts. The findings of the paper match the key stylized facts of banking crises.
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  • Gupta, Poonam, 2005. "Aftermath of banking crises: Effects on real and monetary variables," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 675-691, June.
  • Handle: RePEc:eee:jimfin:v:24:y:2005:i:4:p:675-691
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    2. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
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    4. Chang, Roberto & Velasco, Andres, 2000. "Financial Fragility and the Exchange Rate Regime," Journal of Economic Theory, Elsevier, vol. 92(1), pages 1-34, May.
    5. Guillermo A. Calvo & Carlos A. Végh, 1990. "Interest Rate Policy in a Small Open Economy: The Predetermined Exchange Rates Case," IMF Staff Papers, Palgrave Macmillan, vol. 37(4), pages 753-776, December.
    6. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    7. Charles W. Calomiris & Joseph R. Mason, 2000. "Causes of U.S. Bank Distress During the Depression," NBER Working Papers 7919, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Serwa, Dobromil, 2010. "Larger crises cost more: Impact of banking sector instability on output growth," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1463-1481, December.
    2. International Monetary Fund, 2009. "Paraguay; Selected Issues," IMF Staff Country Reports 09/184, International Monetary Fund.
    3. Ambrosius, Christian, 2017. "What explains the speed of recovery from banking crises?," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 257-287.
    4. Eric Santor, 2003. "Banking Crises and Contagion: Empirical Evidence," Staff Working Papers 03-1, Bank of Canada.
    5. Jokipii, Terhi & Monnin, Pierre, 2013. "The impact of banking sector stability on the real economy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 1-16.
    6. Lagoarde-Segot, Thomas & Leoni, Patrick L., 2013. "Pandemics of the poor and banking stability," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4574-4583.
    7. Ambrosius, Christian, 2016. "What Explains the Speed of Recovery from Banking Crises?," Annual Conference 2016 (Augsburg): Demographic Change 145606, Verein für Socialpolitik / German Economic Association.
    8. Alexandra Lai, 2002. "Modelling Financial Instability: A Survey of the Literature," Staff Working Papers 02-12, Bank of Canada.
    9. Moore, Winston, 2009. "How do financial crises affect commercial bank liquidity? Evidence from Latin America and the Caribbean," MPRA Paper 21473, University Library of Munich, Germany.
    10. Sarah Sanya & Montfort Mlachila, 2010. "Post-Crisis Bank Behavior; Lessons From Mercosur," IMF Working Papers 10/1, International Monetary Fund.

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