Exchange-Rate-Based Stabilization: A Model of Financial Fragility


Yuri V Sobolev

Publication Date:

June 1, 2000

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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


Interactions between banks and open capital account are investigated as rationalizations for empirical regularities characterizing disinflation programs anchored by the exchange rate. The financial system is characterized by bank dominance and lending externality – banks do not internalize the effect of their lending on other banks’ information about potential borrowers. Model dynamics simulation shows that remonetization in the wake of disinflation increases loanable funds supply and translates into bank credit expansion financed by capital inflows. A credit-driven boom results, accompanied by overvaluation and current account deficits generating financial fragilities and vulnerability to a shock that can trigger banking and balance-of-payments crises.


Working Paper No. 2000/122



Publication Date:

June 1, 2000



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