The size of banking crises in credible fixed exchange rate regimes |
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Authors: | Victoria Miller Luc Vallée |
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Institution: | 1. Université du Québec à Montréal, P.O. Box 8888, Station A, Montréal, PQ, Canada H3C 3P8;2. Canada Economic Development, 1255 Peel Street, #900, Montreal, PQ, Canada H3B 2T9 |
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Abstract: | Since monetary policy is constrained in fixed exchange rate regimes, we should observe fewer banking crises due to moral hazard in countries with credible currency pegs. However, three countries with seemingly credible pegs in the nineteen-eighties and -nineties, namely China, Hong Kong and Argentina, still suffered crises in their domestic banking sectors. The present note illustrates that bank incentives to take on excess risk still exist in countries with currency peg credibility and that the size of that risk exposure (and thus the potential for crisis) may be positively related to the level of central bank foreign exchange reserves. |
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Keywords: | F3 G2 |
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