Working Paper: NBER ID: w7272
Authors: Roberto Chang; Andrés Velasco
Abstract: We build a model of financial sector illiquidity in an open economy. Illiquidity defined as a situation in which a country's consolidated financial system has potential short-term obligations in foreign currency that exceed the amount of foreign currency it can have access to on short notice can be associated with self fulfilling bank and/or currency crises. We focus on the policy implications of the model, and study the role of capital inflows and the maturity of external debt, the way in which real exchange rate depreciation can transmit and magnify the effects of bank illiquidity, options for financial regulation, the role of debt and deficits, and the implications of adopting different exchange rate regimes.
Keywords: No keywords provided
JEL Codes: F3; F4; E3; E4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial sector illiquidity (E44) | self-fulfilling crises (H12) |
| capital inflows (F21) | self-fulfilling crises (H12) |
| maturity structure of external debt (F34) | self-fulfilling crises (H12) |
| real exchange rate depreciation (F31) | self-fulfilling crises (H12) |
| exchange rate regimes (F33) | severity of crises (H12) |