Financial Crises in Emerging Markets

Roberto Chang and Andres Velasco

No 6606, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present a simple model that can account for the main features of recent financial crises in emerging markets. The international illiquidity of the domestic financial system is at the center of the problem. Illiquid banks are a necessary and a sufficient condition for financial crises to occur. Domestic financial liberalization and capital flows from abroad (especially if short term) can aggravate the illiquidity of banks and increase their vulnerability to exogenous shocks and shifts in expectations. A bank collapse multiplies the harmful effects of an initial shock, as a credit squeeze and costly liquidation of investment projects cause real output drops and collapses in asset prices. Under fixed exchange rates, a run on banks becomes a run on the currency if the Central Bank attempts to act as a lender of last resort.

JEL-codes: E5 F3 (search for similar items in EconPapers)
Date: 1998-06
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (232)

Published as FRBA, Vol. 84, no. 2 (Second Quarter, 1999): 4-17.
Published as R. Chang & A. Velasco, 2001. "A Model of Financial Crises in Emerging Markets," The Quarterly Journal of Economics, vol 116(2), pages 489-517.

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