IDEAS home Printed from https://ideas.repec.org/p/red/sed017/385.html
   My bibliography  Save this paper

A Model of Financial Crises in Open Economies

Author

Listed:
  • Guido Lorenzoni

    (Northwestern)

  • Luigi Bocola

    (Northwestern University)

Abstract

We study a small open economy with flexible exchange rates and a financial sector that faces a potentially binding collateral constraint. Financial crises in the model are self-fulfilling, and they are associated to drops in real economic activity, real exchange rate depreciations, and current account reversals. The presence of dollarized liabilities in the financial sector makes these crises more likely. These currency mismatches arise endogenously because households have a precautionary motive to save in foreign currency when they expect a confidence crisis with sufficiently high probability. In this framework, we analyze the role of a domestic lender of last resort. Precautionary reserve accumulation by the monetary authority facilitates effective lending of last resort, and can lead to a less dollarized financial sector and to a more stable exchange rate.

Suggested Citation

  • Guido Lorenzoni & Luigi Bocola, 2017. "A Model of Financial Crises in Open Economies," 2017 Meeting Papers 385, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:385
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mark Gertler & Nobuhiro Kiyotaki & Andrea Prestipino, 2020. "A Macroeconomic Model with Financial Panics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(1), pages 240-288.
    2. Mark Gertler & Nobuhiro Kiyotaki & Andrea Prestipino, 2020. "Credit Booms, Financial Crises, and Macroprudential Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 8-33, August.
    3. Mark Gertler & Nobuhiro Kiyotaki & Andrea Prestipino, 2020. "Credit Booms, Financial Crises and Macroprudential Policy," Working Papers 2020-62, Princeton University. Economics Department..

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed017:385. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.