Sovereign Liquidity Crises: Analytics and Implications for Public Policy

Bank of England Working Paper No. 121

40 Pages Posted: 19 Apr 2001

See all articles by Michael K.F. Chui

Michael K.F. Chui

Bank for International Settlements (BIS)

Prasanna Gai

University of Auckland Business School; Australian National University (ANU); Bank of England

Andrew Haldane

Bank of England

Date Written: September 2000

Abstract

This paper offers an analytical framework with which to assess some recent proposals for strengthening the international financial architecture. A model is developed of sovereign liquidity crises that reflect two sources of financial stress?weak fundamentals and self-fulfilling expectations. The nature of the underlying co-ordination game is investigated, as are the properties of the unique equilibrium. In so doing, the paper characterises the welfare costs of belief-driven crises, which are found to be potentially significant. Some recent policy proposals are also evaluated, including prudent debt and liquidity management, capital controls, greater information disclosure, and the efficacy of monetary policy tightening in the midst of crisis.

Suggested Citation

Chui, Michael K.F. and Gai, Prasanna and Haldane, Andrew, Sovereign Liquidity Crises: Analytics and Implications for Public Policy (September 2000). Bank of England Working Paper No. 121, Available at SSRN: https://ssrn.com/abstract=241948 or http://dx.doi.org/10.2139/ssrn.241948

Michael K.F. Chui (Contact Author)

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Prasanna Gai

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Bank of England ( email )

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London, EC2R 8AH
United Kingdom
+020 7601 3583 (Phone)

Andrew Haldane

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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