Show simple item record Burnside, C Eichenbaum, M Rebelo, S 2010-03-09T15:43:27Z 2001-06-23
dc.identifier.citation European Economic Review, 2001, 45 (7), pp. 1151 - 1193
dc.identifier.issn 0014-2921
dc.description.abstract Currency crises that coincide with banking crises tend to share at least three elements. First, banks have a currency mismatch between their assets and liabilities. Second, banks do not completely hedge the associated exchange rate risk. Third, there are implicit government guarantees to banks and their foreign creditors. This paper argues that the first two features arise from bank's optimal response to government guarantees. We show that guarantees completely eliminate banks' incentives to hedge the risk of a devaluation. Our model also articulates one reason why governments might be tempted to provide guarantees to bank creditors. Guarantees lower the domestic interest rate and lead to a boom in economic activity. But this boom comes at the cost of a more fragile banking system. In the event of a devaluation, banks renege on foreign debts and declare bankruptcy. © 2001 Elsevier Science B.V. All rights reserved.
dc.format.extent 1151 - 1193
dc.format.mimetype application/pdf
dc.language.iso en_US
dc.relation.ispartof European Economic Review
dc.relation.isversionof 10.1016/S0014-2921(01)00090-3
dc.title Hedging and financial fragility in fixed exchange rate regimes
dc.type Journal Article
dc.department Economics
pubs.issue 7
pubs.organisational-group /Duke
pubs.organisational-group /Duke/Trinity College of Arts & Sciences
pubs.organisational-group /Duke/Trinity College of Arts & Sciences/Economics
pubs.publication-status Published
pubs.volume 45

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