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Banking crises, sudden stops, and the effectiveness of short-term lending

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  • Chang, Chia-Ying

Abstract

This paper sheds light on the linkages between banking crises and sudden stops and discusses the effectiveness of short-run lending in their prevention. It develops an overlapping generations framework and incorporates the possibilities of bank runs and moral hazard of financial intermediaries. Consequently, I find that the strategy to overcome liquidity problems could worsen banks’ positions and cause bank runs and sudden stops. A small liquidity shock may still lead to a banking crisis through the depositors’ expectation. A large shock would require short-run lending to prevent an immediate bank run, but the repayment obligation may worsen moral hazard problems.

Suggested Citation

  • Chang, Chia-Ying, 2013. "Banking crises, sudden stops, and the effectiveness of short-term lending," Working Paper Series 18795, Victoria University of Wellington, School of Economics and Finance.
    • Handle: RePEc:vuw:vuwecf:18795
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/18795
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    References listed on IDEAS

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    5. Barry Eichengreen, 2004. "Capital Flows and Crises," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262550598, December.
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