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The crisis of 1998 and the role of the central bank

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  • David A. Marshall

Abstract

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.

Suggested Citation

  • David A. Marshall, 2001. "The crisis of 1998 and the role of the central bank," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 2-23.
  • Handle: RePEc:fip:fedhep:y:2001:i:qi:p:2-23:n:v.25no.1
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    Cited by:

    1. Bryan Routledge & Stanley Zin, 2009. "Model Uncertainty and Liquidity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 543-566, October.
    2. Marshall, David A., 2002. "Financial crises and coordination failure: A comment," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 547-555, March.

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    Keywords

    Financial crises ; Banks and banking; Central;

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