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Liquidity Crises in Emerging Markets: Theory and Policy

  • Chang, R.
  • Velasco, A.

We build a model of financial sector illiquidity in an open economy. Illiquidity defined as a situation in which a country's consolidated financial system has potential short-term obligations in foreign currency that exceed the amount of foreign currency it can have access to on short notice can be associated with self fulfilling bank and/or currency crises. We focus on the policy implications of the model, and study the role of capital inflows and the maturity of external debt, the way in which real exchange rate depreciation can transmit and magnify the effects of bank illiquidity, options for financial regulation, the role of debt and deficits, and the implications of adopting different exchange rate regimes.

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File URL: http://econ.as.nyu.edu/docs/IO/9186/RR99-14.PDF
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Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 99-14.

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Length: 60 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:cvs:starer:99-14
Contact details of provider: Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
Phone: (212) 998-8936
Fax: (212) 995-3932
Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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Order Information: Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
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