Bank Failures and Fiscal Austerity: Policy Presecriptions for a Developing Country

Andrew Feltenstein ()

No 2000/090, IMF Working Papers from International Monetary Fund

Abstract: This work employs a dynamic general equilibrium model to evaluate the causes and implications of bank insolvencies. The model is applied to stylized data from several South Asian countries. It derives conclusions about policy instruments designed to alleviate the impact of insolvencies. Firms are subject to intertemporal solvency conditions, and the public withdraws deposits when borrowers default. If banks optimize by restricting credit to risky borrowers, these failures can be partially avoided. Numerical simulations conclude that the combination of compensating monetary policy and restrictive fiscal policy offers the best way of responding to a bank crisis caused by exogenous shocks.

Keywords: WP; banking system; monetary policy; central bank; present value; bank failures; general equilibrium; optimizing bank behavior; bank assets; bank specific; bank solvency requirement; defaulted assets; Commercial banks; Distressed assets; Government debt management; Loans; South Asia (search for similar items in EconPapers)
Pages: 30
Date: 2000-05-01
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Related works:
Journal Article: Bank failures and fiscal austerity: policy prescriptions for a developing country (2001)
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