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Lending of First versus Lending of Last Resort: The Bulgarian Financial Crisis of 1996/19971

  • Michael Berlemann

    ()

    ([1] ifo Institute for Economic Research, Branch Dresden, Einsteinstrasse 3, D-01069 Dresden, Germany [2] Dresden University of Technology, Dresden, Germany.)

  • Nikolay Nenovsky

    ([1] 3Bulgarian National Bank, Sofia, Bulgaria [2] 4University of National and World Economy, Sofia, Bulgaria [3] 5Universit� d'Orl�ans, Orl�ans, France)

In 1996/1997 Bulgaria was hit by a severe financial crisis, spreading from a banking crisis to a currency crisis. We argue that the Bulgarian Financial Crisis might serve as an illustrative example of a twin crisis involving both a currency and a banking crisis. While the Bulgarian Crisis had some properties of the so-called fundamental crises, as explained by first-generation models of currency crises, the severity of the crisis was primarily (but not only) due to systematic and path-dependent moral hazard behaviour of the banking sector. Special attention is paid to the crucial role the Bulgarian National Bank played in the pre-crisis and crisis periods when acting more as a lender of first resort rather than a lender of last resort (LOLR). We also show how Bulgaria managed to overcome the crisis by introducing a second-generation currency board allowing the central bank to act strictly as a limited LOLR, thereby making the country less prone to a financial crisis in the future. Comparative Economic Studies (2004) 46, 245–271. doi:10.1057/palgrave.ces.8100028

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Article provided by Palgrave Macmillan in its journal Comparative Economic Studies.

Volume (Year): 46 (2004)
Issue (Month): 2 (June)
Pages: 245-271

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Handle: RePEc:pal:compes:v:46:y:2004:i:2:p:245-271
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