Government Guarantees, Investment, and Vulnerability to Financial Crises
The paper presents a new model of the East Asian crisis which combines three elements-moral hazard, investment collapse, and multiple equilibria-in a single account. The study locates the causes of the crisis in poor financial regulation, highly leveraged financial institutions, and implicit guarantees to the financial sector. The model has a unique long-run equilibrium with overinvestment. But in the short run, in which the capital stock is fixed, there may be multiple equilibria. In a crisis the government is forced to renege on its guarantees; the effect is a rapid reversal of foreign capital flows. Copyright Blackwell Publishing Ltd 2003.
Year of publication: |
2003
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Authors: | Irwin, Gregor ; Vines, David |
Published in: |
Review of International Economics. - Wiley Blackwell, ISSN 0965-7576. - Vol. 11.2003, 5, p. 860-874
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Publisher: |
Wiley Blackwell |
Saved in:
freely available
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