On the Fundamentals of Self-Fulfilling Prophecies
This paper proposes a theory of twin banking-currency crisis in which both fundamentals and self-fulfilling beliefs play crucial roles. Fundamentals determine whether crises will occur. Self-fulfilling beliefs determine when they occur. The fundamental that causes 'twin crises' is government guarantees to domestic banks' foreign creditors. When these guarantees are in place twin crises inevitably occur, but their timing is a multiple-equilibrium phenomenon that depends on agents' beliefs. So while self-fulfilling beliefs have an important role to play, twin crises do not happen just anywhere. They happen in countries where there are fundamental problems- problems such as guarantees to the financial sector.
|Date of creation:||Jan 2000|
|Date of revision:|
|Contact details of provider:|| Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.|
When requesting a correction, please mention this item's handle: RePEc:roc:rocher:468. 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: (Richard DiSalvo)
If references are entirely missing, you can add them using this form.