Exchange-Rate-Based Stabilization: A Model of Financial Fragility
June 1, 2000
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Summary
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.
Subject: Balance of payments, Bank credit, Banking, Capital inflows, Commercial banks, Consumption, Currencies, Financial institutions, Money, National accounts
Keywords: Bank credit, Bank Intermediation, bank money creation, bank survival probability, borrowing decision, Capital inflows, cash flow, central bank, central bank lending, Commercial banks, Consumption, Credible Disinflation, Currencies, Eastern Europe, exchange rate, Exchange-Rate-Based Stabilization, Financial Fragility, goods sector, market imperfection, nominal exchange rate, rate of inflation, survival probability, trade balance, WP
Pages:
36
Volume:
2000
DOI:
Issue:
122
Series:
Working Paper No. 2000/122
Stock No:
WPIEA1222000
ISBN:
9781451854480
ISSN:
1018-5941
