Short-Term Debt in International Banking Crises

Eunsook Seo
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Eunsook Seo: SangMyung University

Korean Economic Review, 2008, vol. 24, 131-150

Abstract: This paper explores how a bank run can occur when a bank takes into account short-term capital inflow from abroad. My model is an extension of the Diamond-Dybvig model to include the possibility that short-term liquidity needs can be met by borrowing from abroad. In the model, it is more efficient to meet short-term liquidity needs this way than by holding liquid domestic assets. I show conditions under which a ��bad�� equilibrium exists in which pessimistic foreign investors withhold their investments, making a bank run the equilibrium strategy for domestic agents and making those expectations self-fulfilling.

Keywords: Short-term borrowing; Bank runs; Multiple equilibria; Self-fulfilling expectations (search for similar items in EconPapers)
JEL-codes: F3 F4 G2 (search for similar items in EconPapers)
Date: 2008
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