Working Paper: NBER ID: w7091
Authors: Menzie D. Chinn; Michael P. Dooley; Sona Shrestha
Abstract: This paper focuses on the 1995 Latin American and 1997 East Asian crises using an insurance-based model of financial crises. First the model of Dooley (forthcoming) is described. Second, some empirical evidence for an insurance model is presented. The key variables in this approach include the ratio of foreign exchange reserves to bank loans (domestic credit) extended to the private sector, the ability of the private sector to appropriate government assets, and appropriation as measured by capital flight. We argue that the insurance model is consistent with the observed evolution of these variables in the recent crises in Latin America and Asia. Finally, we examine the statistical evidence in favor of the model using panel regressions. We find that the econometric results are consistent with the insurance model, and tend to support this approach over some competing explanations.
Keywords: No keywords provided
JEL Codes: F31; F34; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ratio of foreign exchange reserves to bank loans (F31) | capital flight (F21) |
| domestic credit extended to the private sector (G21) | capital flight (F21) |
| government's desire to accumulate reserves (E60) | ratio of foreign exchange reserves to bank loans (F31) |
| insurance pool's size (G52) | occurrence of capital inflows (F21) |
| occurrence of capital inflows (F21) | speculative attacks (D84) |
| insurance model (G52) | dynamics of currency crises (F31) |