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

Author/Editor:

Andrew Feltenstein

Publication Date:

May 1, 2000

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 2000/090

Subject:

Bank deposits Banking Commercial banks Distressed assets Financial institutions Financial sector policy and analysis Government debt management Labor Loans Public financial management (PFM)

English

Publication Date:

May 1, 2000

ISBN/ISSN:

9781451851380/1018-5941

Stock No:

WPIEA0902000

Pages:

30

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