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Exchange Rate Stability and Financial Stability

  • Barry Eichengreen

    ()

Historical evidence reveals no monocausal explanation for banking crises, including one which would emphasize the maintenance of a currency peg. To some extent this follows from the standard textbook wisdom: whether fixed or flexible exchange rates are preferable depends on the source of disturbances. If threats to the stability of the banking system come from the “outside,” there is a case for exchange rate flexibility to discourage the banks from relying excessively on external sources of finance and to enhance the capacity of the domestic authorities to act as lenders of last resort. Conversely, if the main threats to the stability of the banking system emanate from “inside” (e.g., erratic monetary policies at home), there is an argument for attempting to peg the exchange rate in order to discipline domestic policymakers and vent shocks via the external sector. From this point of view, it is no surprise that there is no simple correlation between the exchange rate regime and the prevalence of banking crises. Copyright Kluwer Academic Publishers 1998

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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 9 (1998)
Issue (Month): 1 (January)
Pages: 569-608

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Handle: RePEc:kap:openec:v:9:y:1998:i:1:p:569-608
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100323

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  1. Sebastian Edwards & Carlos A. Végh, 1997. "Banks and Macroeconomic Disturbances Under Predetermined Exchange Rates," CEMA Working Papers: Serie Documentos de Trabajo. 115, Universidad del CEMA.
  2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  3. Reinhart, Carmen & Kaminsky, Graciela, 2000. "Las crisis gemelas: las causas de los problemas bancarios y de balanza de pagos
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  7. Bordo, Michael D. & Rockoff, Hugh, 1996. "The Gold Standard as a “Good Housekeeping Seal of Approval”," The Journal of Economic History, Cambridge University Press, vol. 56(02), pages 389-428, June.
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  12. Ilan Goldfajn & Rodrigo Valdés, 1997. "Balance of Payments Crises and Capital Flows: The Role of Liquidity," Working Papers Central Bank of Chile 11, Central Bank of Chile.
  13. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," IDB Publications (Working Papers) 5819, Inter-American Development Bank.
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  18. Caprio, Gerard Jr. & Dooley, Michael & Leipziger, Danny & Walsh, Carl, 1996. "The lender of last resort function under a currency board : the case of Argentina," Policy Research Working Paper Series 1648, The World Bank.
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