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Credit constraints, financial liberalisation and twin crises

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  • Haibin Zhu

Abstract

This paper proposes a continuous-time framework that explains some stylised facts in recent "twin crises" episodes. I show that access to the world capital market enables the domestic economy to achieve a more efficient allocation of resources. However, the banking sector becomes more fragile when this international borrowing is wealth-constrained. A temporary shock is amplified and becomes persistent due to the interaction between the value of bank assets and the borrowing constraint. Depending on the exchange rate regime arrangement and the policy of the central bank, this financial fragility can evolve into a banking crisis, a currency crisis, or the simultaneous occurrence of both.

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  • Haibin Zhu, 2003. "Credit constraints, financial liberalisation and twin crises," BIS Working Papers 124, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:124
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    References listed on IDEAS

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    1. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 47-100.
    2. Enrique G. Mendoza & Katherine A. Smith, 2002. "Margin Calls, Trading Costs, and Asset Prices in Emerging Markets: The Finanical Mechanics of the 'Sudden Stop' Phenomenon," NBER Working Papers 9286, National Bureau of Economic Research, Inc.
    3. Reuven Glick & Michael M. Hutchison, "undated". "Banking and Currency Crises: How Common Are Twins?," EPRU Working Paper Series 99-20, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    5. C. E. Weller, 2001. "Financial Crises After Financial Liberalisation: Exceptional Circumstances or Structural Weakness?," Journal of Development Studies, Taylor & Francis Journals, vol. 38(1), pages 98-127.
    6. Ernst-Ludwig VON THADDEN, 1996. "Optimal Liquidity Provision and Dynamic Incentive Compatibility," Cahiers de Recherches Economiques du Département d'économie 9604, Université de Lausanne, Faculté des HEC, Département d’économie.
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    Keywords

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    JEL classification:

    • F3 - International Economics - - International Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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