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The size of banking crises in credible fixed exchange rate regimes

  • Miller, Victoria
  • Vallée, Luc

Since monetary policy is constrained in fixed exchange rate regimes, we should observe fewer banking crises due to moral hazard in countries with credible currency pegs. However, three countries with seemingly credible pegs in the nineteen-eighties and -nineties, namely China, Hong Kong and Argentina, still suffered crises in their domestic banking sectors. The present note illustrates that bank incentives to take on excess risk still exist in countries with currency peg credibility and that the size of that risk exposure (and thus the potential for crisis) may be positively related to the level of central bank foreign exchange reserves.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 7 (November)
Pages: 1226-1236

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:7:p:1226-1236
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Aizenman, Joshua & Marion, Nancy, 2003. "The high demand for international reserves in the Far East: What is going on?," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 370-400, September.
  2. McKinnon, Ronald I & Pill, Huw, 1999. "Exchange-Rate Regimes for Emerging Markets: Moral Hazard and International Overborrowing," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 19-38, Autumn.
  3. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications," IMF Working Papers 06/229, International Monetary Fund.
  4. Miller, V., 2003. "Bank runs and currency peg credibility," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 385-392, June.
  5. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2001. "Hedging and financial fragility in fixed exchange rate regimes," European Economic Review, Elsevier, vol. 45(7), pages 1151-1193.
  6. Rodrik, Dani, 2006. "The Social Cost of Foreign Exchange Reserves," CEPR Discussion Papers 5483, C.E.P.R. Discussion Papers.
  7. Domac, Ilker & Martinez Peria, Maria Soledad, 2003. "Banking crises and exchange rate regimes: is there a link?," Journal of International Economics, Elsevier, vol. 61(1), pages 41-72, October.
  8. miller, Victoria, 2006. "Getting out from between a rock and a hard place: Can china use its foreign exchange reserves to save its banks?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(4), pages 345-354, October.
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