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Balance Sheets, the Transfer Problem, and Financial Crises

Paul Krugman ()

International Tax and Public Finance, 1999, vol. 6, issue 4, 459-472

Abstract: In a world of high capital mobility, the threat of speculative attack becomes a central issue of macroeconomicpolicy. While “first-generation” and “second-generation” models of speculative attacks both have considerablerelevance to particular financial crises of the 1990s, a “third-generation” model is needed to make sense of thenumber and nature of the emerging market crises of 1997-98. Most of the recent attempts to produce such amodel have argued that the core of the problem lies in the banking system. This paper sketches another candidatefor third-generation crisis modeling—one that emphasizes two facts that have been omitted from formal modelsto date: the role of companies' balance sheets in determining their ability to invest, and that of capital flows inaffecting the real exchange rate. Copyright Kluwer Academic Publishers 1999

Keywords: currency crises; balance sheets; capital flows (search for similar items in EconPapers)
Date: 1999
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