A note on Chui, Gai and Haldane's "Sovereign liquidity crisis: Analytics and implications for public policy"

Dina Dreisbach and Fabian Kindermann

Journal of Banking & Finance, 2008, vol. 32, issue 4, 624-629

Abstract: This note corrects the welfare calculations in Chui, Gai and Haldane's paper on sovereign liquidity crisis [Chui, M., Gai, P., Haldane, A.G., 2002. Sovereign liquidity crisis: Analytics and implications for public policy. Journal of Banking and Finance 26, 519-544]. We show that the exact formula not only dramatically reduces the computed welfare consequences from 66% of ex-ante expected output to roughly 13%, but also changes the direction of some reported comparative static results. In addition, we clarify the difference between fundamentals-driven and belief-driven welfare costs and extend some of the sensitivity calculations.

Date: 2008
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