International financial crises, term structure of foreign debt and monetary policy in open economies

• Main Author: Caliskan, Ahmet
• Other Authors: Hernandez-Verme, Paula
• Format: Others
• Language: en_US
• Published: Texas A&M University 2006
• Subjects: Financial Fragility; External Debt; Bank Runs; Sudden Stops
• Online Access: http://hdl.handle.net/1969.1/3756

In this dissertation, I study international financial crises. For this purpose, I build two models. In the first model, I focus on financial crises in developing, large open economies where foreign debt with various maturities and issue dates is available. The objective is to measure the vulnerability of the domestic financial system to domestically triggered bank runs and externally triggered sudden stops. The main contribution of this model is that both types of crises are treated as rational responses of domestic depositors and international creditors. Such vulnerability measures are linked to fundamentals and equilibrium term structure of foreign debt. Banks’ vulnerability to runs increases if they hold a relatively shorter term debt. Also, a larger cost of liquidating the long-term investment before maturity makes the banks more fragile. In the next step, given a domestic banking crisis, I allow international creditors to decide whether they want to stop lending to domestic banks (in which case a “sudden stop” takes place) or not. A sudden stop is more likely if (i) creditors highly discount future consumption, (ii) creditors’ current income is small relative to their future income, and (iii) the cost of liquidating the long-term investment before maturity is small. In the second model, I investigate the merits of alternative monetary policies with respect to financial fragility. In this monetary model of an explicit financial system, I motivate the demand for two fiat currencies by spatial separation and limited communication of agents. There is a domestic and a foreign currency freely traded without restrictions. I analyze the policy of a constant growth rate of domestic money supply with a floating exchange rate regime. Both currencies are held in positive amounts at the steady-state only if the growth rate of domestic money supply is equal to the world inflation rate (WIR). If the former rate is larger than the WIR, domestic currency is not held at the steady-state. Also, total real money balances held is negatively related with WIR. Finally, monetary policy in the form of a constant growth rate of domestic money supply is neutral with respect to welfare.