Financial Fragility and the Exchange Rate Regime
We study financial fragility, exchange rate crises and monetary policy in an open economy model in which banks are maturity transformers as in Diamond-Dybvig. The banking system, the exchange rate regime, and central bank credit policy are seen as parts of a mechanism intended to maximize social welfare; if the mechanism fails, banking crises and speculative attacks become possible. We compare currency boards, fixed rate and flexible rates, with and without a lender of last resort. A currency board cannot implement a socially optimal allocation; in addition, under a currency board bank runs are possible. A fixed exchange rate system may implement the social optimum but is more prone to bank runs and exchange rate crises than a currency board. Larger capital inflows enhance welfare if the no-run equilibrium occurs, but may also render the economy more vulnerable to self-fulfilling runs. A flexible exchange rate system implements the social optimum and eliminates runs, provided the exchange rate and central bank lending policies of the central bank are appropriately designed.
|Date of creation:||Mar 1998|
|Date of revision:|
|Publication status:||published as Chang, Roberto and Andres Velasco. "Financial Fragility And The Exchange Rate Regime," Journal of Economic Theory, 2000, v92(1,May), 1-34.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Stephen D. Williamson, 1998.
"Discount Window Lending and Deposit Insurance,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 246-275, January.
- Reinhart, Carmen & Kaminsky, Graciela, 1999.
"The twin crises: The causes of banking and balance of payments problems,"
14081, University Library of Munich, Germany.
- 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.
- Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
- Reinhart, Carmen & Kaminsky, Graciela, 2000.
"Las crisis gemelas: las causas de los problemas bancarios y de balanza de pagos
[The twin crises: Te causes of banking and balance of payments problems]," MPRA Paper 13842, University Library of Munich, Germany.
- Enrica Detragiache, 1996.
"Rational Liquidity Crises in the Sovereign Debt Market: In Search of a Theory,"
IMF Staff Papers,
Palgrave Macmillan, vol. 43(3), pages 545-570, September.
- Enrica Detragiache, 1996. "Rational Liquidity Crises in the Sovereign Debt Market; In Search of a Theory," IMF Working Papers 96/38, International Monetary Fund.
- Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937.
- Garber, P.M. & Svensson, L.E.O., 1994.
"The Operation and Collapse of Fixed Exchange Rate Regimes,"
588, Stockholm - International Economic Studies.
- Garber, Peter M. & Svensson, Lars E.O., 1995. "The operation and collapse of fixed exchange rate regimes," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 36, pages 1865-1911 Elsevier.
- Peter M. Garber & Lars E.O. Svensson, 1994. "The Operation and Collapse of Fixed Exchange Rate Regimes," NBER Working Papers 4971, National Bureau of Economic Research, Inc.
- Neil Wallace, 1996. "Narrow banking meets the Diamond-Dybvig model," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-13.
- Schreft, Stacey L. & Smith, Bruce D., 1997.
"Money, Banking, and Capital Formation,"
Journal of Economic Theory,
Elsevier, vol. 73(1), pages 157-182, March.
- Jeffrey D. Sachs & Aaron Tornell & Andrés Velasco, 1996.
"Financial Crises in Emerging Markets: The Lessons from 1995,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 27(1), pages 147-216.
- Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," NBER Working Papers 5576, National Bureau of Economic Research, Inc.
- Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Harvard Institute of Economic Research Working Papers 1759, Harvard - Institute of Economic Research.
- Champ, B. & Snith, B.D. & Williamson, D.S., 1991.
"Currency Elasticity and Banking Panics: Theory and Evidence,"
RCER Working Papers
292, University of Rochester - Center for Economic Research (RCER).
- Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-64, November.
- Champ, B. & Smith, B.D., 1991. "Currency Elasticity and Banking Panics: theory and Evidence," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9109, University of Western Ontario, The Centre for the Study of International Economic Relations.
- Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
- Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The "Overborrowing Syndrome"," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476.
- Betts, Caroline M & Smith, Bruce D, 1997. "Money, Banking, and the Determination of Real and Nominal Exchange Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 703-34, August.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:6469. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.