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Capital Flows and the Twin Crises: The Role of Liquidity
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In this article, a model that focuses on the interaction of liquidity creation by financial intermediaries with capital flows and exchange rate collapses is developed. But the model is not suitable for the case of large inflows and abrupt outflows.Abstract:
This paper develops a model that focuses on the interaction of liquidity creation by financial intermediaries with capital flows and exchange rate collapses. The intermediaries` role of transforming maturities is shown to result in larger movements of capital and a higher probability of crisis. These movements resemble the observed cycle in capital flows: large inflows, crisis and abrupt outflows. The model highlights how adverse productivity and international interest rate shocks may trigger a sudden outflow of capital and an exchange collapse. The initial shock is magnified by the behavior of individual foreign investors linked through their deposits in the intermediaries. The expectation of an eventual exchange rate crisis links investors` behavior even further.read more
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What Caused the Asian Currency and Financial Crisis
TL;DR: This article explored the view that the Asian currency and financial crises in 1997 and 1998 reflected structural and policy distortions in the countries of the region, even if market overreaction and herding caused the plunge of exchange rates, asset prices and economic activity to be more severe than warranted by the initial weak economic conditions.
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A Rational Expectations Model of Financial Contagion
Laura E. Kodres,Matthew Pritsker +1 more
TL;DR: This paper developed a multiple asset rational expectations model of asset prices to explain financial market contagion through cross-market rebalancing, where investors transmit idiosyncratic shocks from one market to others by adjusting their portfolios' exposures to shared macroeconomic risks.
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A rational expectations model of financial contagion
Laura E. Kodres,Matthew Pritsker +1 more
TL;DR: The authors developed a multiple asset rational expectations model of asset prices to study the determinants of financial market contagion, and to provide an explanation for the pattern of contagion during the Asian financial crisis.
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Contagion: Understanding How It Spreads
TL;DR: In this paper, the authors highlight the importance of other links through which shocks are normally transmitted including trade and finance, and identify the types of links and other macroeconomic conditions that can make a country vulnerable to contagion during crisis periods.
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Leverage Cycles and the Anxious Economy
Ana Fostel,John Geanakoplos +1 more
TL;DR: In this paper, the authors present a theory of asset pricing that will shed light on the problems of emerging assets (like emerging markets) that are not yet mature enough to be attractive to the general public, and argue that the periodic problems faced by emerging asset classes are sometimes symptoms of what we call a global anxious economy rather than of their own fundamental weaknesses.
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Bank Runs, Deposit Insurance, and Liquidity
TL;DR: The authors showed that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits, and showed that there are circumstances when government provision of deposit insurance can produce superior contracts.
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The twin crises: the causes of banking and balance-of-payments problems
TL;DR: This paper examined the potential links between banking and balance-of-payments crises and found that financial liberalization usually predates banking crises, indeed, it helps predict them, rather than a causal relationship from banking to balance of payments crises.
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“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors
TL;DR: The characteristics of recent capital inflows into Latin America are discussed in this paper, where it is argued that these inflows are partly explained by conditions outside the region, like the recession in the United States and lower international interest rates.
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Collapsing exchange-rate regimes: Some linear examples
Robert P. Flood,Peter M. Garber +1 more
TL;DR: In this paper, the authors construct a pair of linear examples to study the collapse time of a fixed exchange-rate regime and derive a stochastic model for the same problem.