Strategic Complementarities and the Twin Crises
University of Pennsylvania - The Wharton School - Finance Department
Economic Journal, Vol. 115, No. 503, pp. 368-390, April 2005
The economic literature emphasised the role of strategic complementarities in generating banking crises and currency crises. Motivated by evidence from recent financial crises, we study a model, where strategic complementarities exist, not only within a group of creditors or within a group of currency speculators, but also between the two groups. The additional type of complementarities generates a vicious circle between banking crises and currency crises. This magnifies the correlation between the two crises and destabilises the economy. We show that, due to the vicious circle, a Lender of Last Resort might not be able to prevent bank runs.
Number of Pages in PDF File: 23Accepted Paper Series
Date posted: April 2, 2005
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