A Dual Liquidity Model for Emerging Markets
10 Pages Posted: 17 Jan 2002
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A Dual Liquidity Model for Emerging Markets
A Dual Liquidity Model for Emerging Markets
Date Written: January 2002
Abstract
The last few years have seen a significant re-evaluation of the models used to analyze crises in emerging markets. Recent models typically stress financial constraints or distorted financial incentives. While this certainly represents progress, these models share a weakness with the earlier work: neither is uniquely about emerging markets. Adaptations of the Mundell-Fleming model represent Argentina as a Belgium with larger external shocks. Likewise, emerging market models of financial constraints are adaptations of developed economy ones with tighter financial constraints. In our work, we have advocated a model that distinguishes between the financial constraints affecting borrowing and lending among agents within an emerging economy, and those affecting borrowing from foreign lenders. This "dual liquidity" model offers a parsimonious description of the behavior of firms, governments, and asset prices during financial crises. It also provides prescriptions for optimal policy responses to these crises.
Keywords: Capital flows, external crises, international and domestic liquidity, monetary policy, fiscal policy, underinsurance
JEL Classification: E0, E4, E5, F0, F3, F4, G1
Suggested Citation: Suggested Citation
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