Banking systems have rapidly grown to a point where for many countries bank assets amount to multiples of GDP. As a consequence, government’s capacity to provide stability-enhancing fiscal guarantees against systemic crises can no longer be taken for granted. As regulation of dynamic financial...

Central bank policy suffers from time-inconsistency when facing a banking crisis: A bailout is optimal ex post but ex ante it should be limited to control moral hazard. Dollarization provides a credible commitment not to help at the cost of not helping even when it would be ex ante optimal to do...

A key precursor of twentieth-century financial crises in emerging and advanced economies alike was the rapid buildup of leverage. Those emerging economies that avoided leverage booms during the 2000s also were most likely to avoid the worst effects of the twenty-first century’s first global...

This Paper outlines some issues regarding the interaction of independent fiscal authorities and one central bank in the European monetary union. It points out the possibilities for coordination failures, ranging everywhere from potentially excessive deficits and free-riding problems to...

This paper provides a survey of the Great Depression comprising both a narrative account and adetailed review of the empirical evidence focusing especially on the experience of the United States. We examine the reasons for and the flawed resolution of the American banking crisis as well as the...

This Paper explores the implications of different strategies for financing the fiscal costs of twin crises in inflation and depreciation rates. We use a first-generation type model of speculative attacks which has four key features: (i) the crisis is triggered by prospective deficits: (ii) there...

This Paper addresses two questions: (i) how do governments actually pay for the fiscal costs associated with currency crises; and (ii) what are the implications of different financing methods for post-crisis rates of inflation and depreciation? We study these questions using a general...

This paper argues that the recent Southeast Asian currency crises was caused by large prospective deficits associated with implicit bailout guarantees to failing banking systems. We articulate this view using a simple dynamic general equilibrium model whose key feature is that a speculative...

Exploiting the Japanese banking crisis as a laboratory, we provide firm-level evidence on the real effects of bank bailouts. Government recapitalizations result in positive abnormal returns for the clients of recapitalized banks. After recapitalizations, banks extend larger loans to their...