Credit constraints, financial liberalisation and twin crises

Zhu Haibin

No 124, BIS Working Papers from Bank for International Settlements

Abstract: This paper proposes a continuous-time framework that explains some stylised facts in recent "twin crises" episodes. I show that access to the world capital market enables the domestic economy to achieve a more efficient allocation of resources. However, the banking sector becomes more fragile when this international borrowing is wealth-constrained. A temporary shock is amplified and becomes persistent due to the interaction between the value of bank assets and the borrowing constraint. Depending on the exchange rate regime arrangement and the policy of the central bank, this financial fragility can evolve into a banking crisis, a currency crisis, or the simultaneous occurrence of both.

Keywords: currency crises; borrowing constraint; banking crises (search for similar items in EconPapers)
JEL-codes: F3 G21 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2003-01
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