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The Banking and Currency Crises in Bulgaria: 1996 - 1997

  • Preslava Kovatchevska
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    The paper examines the nature of the Bulgarian banking and currency crises in 1996.1997 and evaluates the causal link between them. The analysis shows that the banking crisis has resulted from slow structural reforms, inefficient prudential regulation and prolonged unsound lending practices. The probit model estimates illustrate that excessive credit, augmented interest rate spread and overvalued exchange rate exacerbated the banks' liquidity position. The currency crisis was a consequence of expansionary monetary policy, which led to irreversible depletion of international reserves and caused eventual collapse of the exchange rate. The probit estimations found real exchange rate, money multiplier, interest rate, current account balance, ratio of broad money to reserves and credit expansion to be the most relevant indicators of the balance-of-payment crisis. The causal link between the twin crises is explained through expansionary monetary policy that comes as a response to the banking crisis. It focuses on the inability of the central bank to sustain the exchange rate when it faces a run on its reserves.

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    File URL: http://www.case-research.eu/upload/publikacja_plik/SA204.pdf
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    Paper provided by CASE-Center for Social and Economic Research in its series CASE Network Studies and Analyses with number 0204.

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    Length: 40 Pages
    Date of creation: 2000
    Date of revision:
    Handle: RePEc:sec:cnstan:0204
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    1. Blackburn, Keith & Sola, Martin, 1993. " Speculative Currency Attacks and Balance of Payments Crises," Journal of Economic Surveys, Wiley Blackwell, vol. 7(2), pages 119-44, June.
    2. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
    3. Roberto Chang & Andres Velasco, 1998. "Financial Fragility and the Exchange Rate Regime," NBER Working Papers 6469, National Bureau of Economic Research, Inc.
    4. Sachs, Jeffrey & Tornell, Aaron & Velasco, Andres, 1995. "The Collapse of the Mexican Peso: What Have We Learned?," Working Papers 95-22, C.V. Starr Center for Applied Economics, New York University.
    5. Asli Demirgüç-Kunt & Enrica Detragiache, 1997. "The Determinants of Banking Crises; Evidence From Developing and Developed Countries," IMF Working Papers 97/106, International Monetary Fund.
    6. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
    7. P. Honohan, 2000. "Banking System Failures in Developing and Transition Countries: Diagnosis and Prediction," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 29(1), pages 83-109, 02.
    8. Maurice Obstfeld, 1984. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc.
    9. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    10. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," Working Paper 98-10, Federal Reserve Bank of Atlanta.
    11. Ilan Goldfajn & Rodrigo O. Valdés, 1997. "Capital Flows and the Twin Crises ; The Role of Liquidity," IMF Working Papers 97/87, International Monetary Fund.
    12. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
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