Banking System, International Investors and Central Bank Policy in Everging Markets
This paper argues that the liberalization of capital inflows in a small open economy with a financial system dominated by banks may provoke a soft budget constraint distortion, because large amounts of funds become available at relatively low cost. International investors internalize the risk of accumulation of losses by the banking system only when the risk premium is sufficienly high so as to detemine a positive probability that banks will default. This wxplains why crises occur when massive losses have already been accumulated.
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|Date of creation:||2000|
|Date of revision:|
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