Strategic Complementarities and the Twin Crises

23 Pages Posted: 2 Apr 2005

See all articles by Itay Goldstein

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Abstract

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.

Suggested Citation

Goldstein, Itay, Strategic Complementarities and the Twin Crises. Economic Journal, Vol. 115, No. 503, pp. 368-390, April 2005. Available at SSRN: https://ssrn.com/abstract=696968

Itay Goldstein (Contact Author)

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

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