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The crisis of 1998 and the role of the central bank

Listed author(s):
  • David A. Marshall

Following the Russian default and devaluation in August 1998, financial markets were characterized by a withdrawal of liquidity, a flight to the safest assets, increased concerns about credit quality, and large declines in asset values. However, the crisis ended following a rather modest interest rate cut by the Federal Reserve. Why did the central bank's action have this effect? This article argues that the crisis was an episode of potential coordination failure, triggered by, but distinct from, the events in Russia. The Federal Reserve's action signaled a policy change that serve to eliminate the coordination failure equilibrium.

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Article provided by Federal Reserve Bank of Chicago in its journal Economic Perspectives.

Volume (Year): (2001)
Issue (Month): Q I ()
Pages: 2-23

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Handle: RePEc:fip:fedhep:y:2001:i:qi:p:2-23:n:v.25no.1
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  1. Roger Lagunoff & Stacey L. Schreft, 1999. "Financial fragility with rational and irrational exuberance," Proceedings, Federal Reserve Bank of Cleveland, pages 531-567.
  2. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
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  7. Lawrence J. Christiano & Christopher J. Gust, 2000. "The expectations trap hypothesis," International Finance Discussion Papers 676, Board of Governors of the Federal Reserve System (U.S.).
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  9. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
  10. den Haan, Wouter J. & Ramey, Garey & Watson, Joel, 2000. "Liquidity Flows and Fragility of business Enterprises," University of California at San Diego, Economics Working Paper Series qt3d899423, Department of Economics, UC San Diego.
  11. Mortensen, Dale T & Pissarides, Christopher, 1999. "New Developments in Models of Search in the Labour Market," CEPR Discussion Papers 2053, C.E.P.R. Discussion Papers.
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  17. repec:wop:calsdi:99-07r is not listed on IDEAS
  18. Ricardo Lagos, 2000. "An Alternative Approach to Search Frictions," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 851-873, October.
  19. Russell Cooper & Andrew John, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 441-463.
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