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When Bad Things Happen to Good Banks: Contagious Bank Runs and Currency Crises

Author

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  • Raphael H. Solomon

Abstract

The author develops a twin crisis model featuring multiple banks. At each bank, domestic and foreign depositors play a banking game. This game has a run and a no-run equilibrium. Bank failures drain reserves in addition to those drained when foreign agents convert domestic currency to foreign. The fixed exchange rate collapses if a threshold number of banks fail. Agents observe sunspots to aid their equilibrium selection. The numerical solution matches somewhat the Turkish financial sector prior to the crisis of 2001. The Turkish exchange rate appears to have exposed the financial system to a 10 per cent risk of collapse.

Suggested Citation

  • Raphael H. Solomon, 2004. "When Bad Things Happen to Good Banks: Contagious Bank Runs and Currency Crises," Staff Working Papers 04-18, Bank of Canada.
  • Handle: RePEc:bca:bocawp:04-18
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    References listed on IDEAS

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    Cited by:

    1. Cornell, Christopher M. & Solomon, Raphael H., 2007. "Are currency crises low-state equilibria?: An empirical, three-interest-rate model," Journal of Policy Modeling, Elsevier, pages 489-504.

    More about this item

    Keywords

    Exchange rates; Financial institutions;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F30 - International Economics - - International Finance - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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