Aftermath of Banking Crises: Effectson Real and Monetary Variables

June 1, 2000

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

In this paper a simple optimizing model is developed to analyze the implications of a banking crisis. Banks are incorporated by assuming that they intermediate funds between firms and households. It is shown that when depositors perceive the quality of deposits to have deteriorated, they switch from deposits to cash. Because of the higher cost of liquidity, consumption, M2 and the M2 multiplier decline, interest rates on deposits and loans increase and output contracts. The findings of the paper match the key stylized facts of banking crises.

Subject: Bank credit, Banking, Banking crises, Consumption, Credit, Currencies, Financial crises, Money, National accounts

Keywords: Bank credit, bank credit line, Banking crises, Banking Crisis, cash reserves, Consumption, Credit, Currencies, current account, deposit guarantee, deposits withdrawal, East Asia, economic activity, effective demand, lending-to-deposit interest rate, liquidity of deposit, money multiplier, open economy, opportunity cost, present discounted value, substitution effect, WP

Pages:
25
Volume:
2000
DOI:
---
Issue:
096
Series:
Working Paper No. 2000/096
Stock No:
WPIEA0962000
ISBN:
9781451851908
ISSN:
1018-5941

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