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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 2982, Victoria University of Wellington, School of Economics and Finance.
  • Handle: RePEc:vuw:vuwecf:2982
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    File URL: http://researcharchive.vuw.ac.nz/handle/10063/2982
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    References listed on IDEAS

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    1. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 195-209.
    2. Barry Eichengreen & Poonam Gupta & Ashoka Mody, 2008. "Sudden Stops and IMF-Supported Programs," NBER Chapters,in: Financial Markets Volatility and Performance in Emerging Markets, pages 219-266 National Bureau of Economic Research, Inc.
    3. 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, January.
    4. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
    5. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    6. Chevalier, Judith A & Scharfstein, David S, 1996. "Capital-Market Imperfections and Countercyclical Markups: Theory and Evidence," American Economic Review, American Economic Association, vol. 86(4), pages 703-725, September.
    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. Sebastian Edwards, 2004. "Financial Openness, Sudden Stops, and Current-Account Reversals," American Economic Review, American Economic Association, vol. 94(2), pages 59-64, May.
    9. Neil Wallace, 1996. "Narrow banking meets the Diamond-Dybvig model," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-13.
    10. Chang, Chia-Ying, 2012. "When banking systems meet currencies," Working Paper Series 2062, Victoria University of Wellington, School of Economics and Finance.
    11. Barry Eichengreen, 2004. "Capital Flows and Crises," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262550598, January.
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    Cited by:

    1. Chang, Chia-Ying, 2013. "Capital controls, capital flows, and banking crises," Working Paper Series 2979, Victoria University of Wellington, School of Economics and Finance.

    More about this item

    Keywords

    Banking crises; Sudden stops; Moral hazard; Short-run lending; Capital flows;

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