Balance Sheet Effects, Bailout Guarantees and Financial Crises

59 Pages Posted: 15 Dec 2000 Last revised: 20 Oct 2010

See all articles by Martin Schneider

Martin Schneider

Independent

Aaron Tornell

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 2000

Abstract

Several recent twin' currency and banking crises were preceded by lending booms during which the banking system financed rapid growth of the nontradable (N) sector by borrowing in foreign currency. They were followed by recessions during which a sharp decline in credit especially hurt the N-sector. This paper presents a model that accounts for these stylized facts. A crucial element is that we model a banking system that is simultaneously subject to two distortions typical of international credit markets: bailout guarantees and the imperfect enforceability of contracts. The interaction of these distortions produces unusually fast N-sector growth, together with a real appreciation, during the boom. However, it is also responsible for self-fulfilling twin crises, which have persistent adverse effects on N-sector output.

Suggested Citation

Schneider, Martin and Tornell, Aaron, Balance Sheet Effects, Bailout Guarantees and Financial Crises (December 2000). NBER Working Paper No. w8060. Available at SSRN: https://ssrn.com/abstract=254021

Martin Schneider

Independent ( email )

No Address Available
United States

Aaron Tornell (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Bunche Hall 8387
Los Angeles, CA 90095-1477
United States
310-794-1686 (Phone)
310-825-9528 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
45
Abstract Views
2,569
PlumX Metrics