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

  • Chang, Chia-Ying

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.

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File URL: http://researcharchive.vuw.ac.nz/handle/10063/2982
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Paper provided by Victoria University of Wellington, School of Economics and Finance in its series Working Paper Series with number 2982.

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Date of creation: 2013
Date of revision:
Handle: RePEc:vuw:vuwecf:2982
Contact details of provider: Postal:
Alice Fong, Administrator, School of Economics and Finance, Victoria Business School, Victoria University of Wellington, PO Box 600 Wellington, New Zealand

Phone: +64 (4) 463-5353
Fax: +64 (4) 463-5014
Web page: http://www.victoria.ac.nz/sef
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  1. Sebastian Edwards, 2004. "Financial Openness, Sudden Stops and Current Account Reversals," NBER Working Papers 10277, National Bureau of Economic Research, Inc.
  2. Neil Wallace, 1996. "Narrow banking meets the Diamond-Dybvig model," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-13.
  3. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1994. "The Financial Accelerator and the Flight to Quality," Working Papers 94-24, C.V. Starr Center for Applied Economics, New York University.
  4. Sebastian Edwards & Márcio G. P. Garcia, 2008. "Financial Markets Volatility and Performance in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number edwa05-1.
  5. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  6. Judith A. Chevalier & David S. Scharfstein, 1994. "Capital Market Imperfections and Countercyclical Markups: Theory and Evidence," NBER Working Papers 4614, National Bureau of Economic Research, Inc.
  7. Boyd, John H. & Smith, Bruce D., 1997. "Capital Market Imperfections, International Credit Markets, and Nonconvergence," Journal of Economic Theory, Elsevier, vol. 73(2), pages 335-364, April.
  8. Barry Eichengreen, 2004. "Capital Flows and Crises," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262550598.
  9. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
  10. Barry J. Eichengreen & Poonam Gupta & Ashoka Mody, 2006. "Sudden Stops and IMF-Supported Programs," IMF Working Papers 06/101, International Monetary Fund.
  11. Chang, Chia-Ying, 2012. "When banking systems meet currencies," Working Paper Series 2062, Victoria University of Wellington, School of Economics and Finance.
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