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Banking Performance and Speculative Attacks Under Asymmetric Information

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  • Nabi, Mahmoud Sami

Abstract

The Asian financial crisis of 1997 evolved through many stages. Although there is a consensus among economists on its "ingredients", a disagreement still exists about the exact mechanisms. This paper proposes a model explaining the triggering event of the crisis as represented by the abandon of Thailand and Korea of their fixed exchange rate. The model suggests that an external negative shock to the price of tradable goods can be the detonator of a currency crisis if some ingredients already exist. In this context, I show that the efficiency of the banking system and the speculators-government interaction play crucial roles. Under certain conditions, an efficient banking system enables the economy to resist to even high magnitudes of the shock, while an inefficient one leads to a currency crisis. In this model, abandoning the fixed parity implies a cost to the government and characterizes its type. Speculators infer the government's type when deciding to attack the currency. The paper has the following innovation: it shows that a slight variation in speculators' inference precision causes a sudden change in their sentiment, a speculative attack and the abandon of the parity.

Suggested Citation

  • Nabi, Mahmoud Sami, 2001. "Banking Performance and Speculative Attacks Under Asymmetric Information," MPRA Paper 24515, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:24515
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    File URL: https://mpra.ub.uni-muenchen.de/24515/1/MPRA_paper_24515.pdf
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    References listed on IDEAS

    as
    1. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-597, June.
    2. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2001. "Hedging and financial fragility in fixed exchange rate regimes," European Economic Review, Elsevier, vol. 45(7), pages 1151-1193.
    3. Philippe Bacchetta & Eric van Wincoop, 2000. "Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility," NBER Chapters,in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 61-98 National Bureau of Economic Research, Inc.
    4. Stephan Haggard, 2000. "Political Economy of the Asian Financial Crisis, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 107.
    5. Craig Burnside & Martin Eichenbaum & Sergio T. Rebelo, 2000. "On the Fundamentals of Self-Fulfilling Speculative Attacks," NBER Working Papers 7554, National Bureau of Economic Research, Inc.
    6. Flood, Robert P. & Jeanne, Olivier, 2005. "An interest rate defense of a fixed exchange rate?," Journal of International Economics, Elsevier, vol. 66(2), pages 471-484, July.
    7. Chang, Roberto & Velasco, Andres, 2000. "Financial Fragility and the Exchange Rate Regime," Journal of Economic Theory, Elsevier, vol. 92(1), pages 1-34, May.
    8. Flood, Robert & Marion, Nancy, 1999. "Perspectives on the Recent Currency Crisis Literature," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-26, January.
    9. Frederic S. Mishkin, 1999. "International Capital Movements, Financial Volatility and Financial Instability," NBER Working Papers 6390, National Bureau of Economic Research, Inc.
    10. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Banking; speculative attacks; currency crisis; asymmetric information;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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