Financial instability, political crises and contagion
This paper studies banking liquidity crises under the assumption that the government may have private benefits in bailing-out a collapsing banking sector for reputation concerns. This political distortion feeds political uncertainty, as citizens may not agree with a bailout decision and overthrow the government. This paper shows that higher political uncertainty increases both fînancial and political instabilities as it enlarges the set of parameters for which bank runs and the dismissal of the government are optimal. Higher political uncertainty may stern from the occurrence of a politico-financial crisis in another similar country. Contagion takes place if citizens update their beliefs on the type of their government. Doing so, they may reinforce their beliers that the government is self-interested and bank bailouts are not socially optimal.
|Date of creation:||01 Dec 2007|
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- Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998.
"Paper Tigers? A Model of the Asian Crisis,"
NBER Working Papers
6783, National Bureau of Economic Research, Inc.
- Douglas W. Diamond & Philip H. Dybvig, 2000.
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Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- Roberto Chang & Andres Velasco, 2001. "A Model of Financial Crises in Emerging Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 489-517.
- Giannetti, Mariassunta, 2003. " Bank-Firm Relationships and Contagious Banking Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 239-261, April.
- Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2004. "Government guarantees and self-fulfilling speculative attacks," Journal of Economic Theory, Elsevier, vol. 119(1), pages 31-63, November.
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