External constraint and financial crises with balance sheet effects

Meixing Dai ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the dynamic implications of Krugman’s (1999) model of financial crises with balance-sheet effects, which has a considerable impact on the literature as well as the teaching of international financial crisis. By explicitly taking account of wealth accumulation and external equilibrium condition, it is shown that a financial crisis in emerging market economies, instead of being interpreted as a jump from a good to a bad equilibrium with zero investment and zero foreign debt, could be explained as a jump from an unstable dynamic trajectory to a stable one. The dynamic framework illustrates well the analysis of different factors at the origin of financial vulnerability and crisis. By discriminating the financial crises according to the severity of their negative impacts on the domestic economy, the present study also adds some insights in the analysis of policy implications.

Keywords: Financial crisis; currency crisis; balance sheet effect; external solvency constraint. (search for similar items in EconPapers)
JEL-codes: F31 F32 F34 F41 (search for similar items in EconPapers)
Date: 2010-03-24
New Economics Papers: this item is included in nep-acc and nep-ifn
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: External Constraint and Financial Crises with Balance Sheet Effects (2012)
Working Paper: External constraint and financial crises with balance sheet effects (2010)
Working Paper: External constraint and financial crises with balance sheet effects (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:21625

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