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Banking System, International Investors and Central Bank Policy in Everging Markets

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  • Giannetti, M.

Abstract

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.

Suggested Citation

  • Giannetti, M., 2000. "Banking System, International Investors and Central Bank Policy in Everging Markets," Papers 369, Banca Italia - Servizio di Studi.
  • Handle: RePEc:fth:banita:369
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    Cited by:

    1. Fabio Panetta, 2001. "The Stability of the Relation between the Stock Market and Macroeconomic Forces," Temi di discussione (Economic working papers) 393, Bank of Italy, Economic Research and International Relations Area.
    2. Massimo Sbracia & Andrea Zaghini, 2003. "The Role of the Banking System in the International Transmission of Shocks," The World Economy, Wiley Blackwell, vol. 26(5), pages 727-754, 05.
    3. SAU, Lino, 2001. "Stato del Credito, Effetto Cash-flow ed Instabilità
      [State of Credit, Cash-flow Effect and Instability]
      ," MPRA Paper 3641, University Library of Munich, Germany.

    More about this item

    Keywords

    BANKS ; INTERNATIONAL INVESTMENTS ; MARKET;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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