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Lecture 8-Financial Crisis-E(halan)

Lecture 8-Financial Crisis-E(halan)

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Published by damsana3

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Published by: damsana3 on Aug 26, 2008
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05/09/2014

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Lecture 8:Financial Crises
Development Finance2008
 
 
Financial Crises
Currency crisis
Currency or balance-of-payment crisis refers to thesituation where the government does not havesufficient foreign exchange reserves to satisfy theforeign exchange demand, and is forced to devalue itscurrency.
Banking Crisis
A banking crisis occurs when bank runs induce banksto suspend their operations or force the government toprovide financial support. The contributing factor isoften the amounting problem of bad debts which eatinto bank capital. Banking crisis may also be triggeredby contagion.
 Twin crisis
 
 
Flood & Garber Model (1984)
Real moneydemand:Purchasing powerparity
P
=
E
P
*
Interest rate parityMoney supply
M
=
R
+
D
Domestic credit
D
=
D
(1 +
 µ 
.
)
Basic equation
 P 
γ  
=
    +=
e
 E  E  E  P 
**
γ  
e
 E  E 
=
*
Fixed ER
0
=
e
 E  E 
=
**
 E  P 
γ  
 P   E 
α γ  
1)(
**
==
Floating ER when R =0
===
 µ 
e
 E  E  D D
=
**
 E  P 
γ  
 P   E 
β α  µ γ  
==
1)(
**

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