Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/100855
Authors: 
Chang, Roberto
Velasco, Andres
Year of Publication: 
1997
Series/Report no.: 
Working Paper, Federal Reserve Bank of Atlanta 97-16
Abstract: 
We study financial fragility, exchange rate crises, and monetary policy in an open economy version of a Diamond-Dybvig model. The banking system, the exchange rate regime, and central bank credit policy are seen as parts of a mechanism intended to maximize social welfare; if the mechanism fails, banking crises and speculative attacks become possible. We compare currency boards, fixed rates, and flexible rates with and without a lender of last resort. A currency board cannot implement a socially optimal allocation; in addition, bank runs are possible under a currency board. A fixed exchange rate system may implement the social optimum but is more prone to bank runs and exchange rate crises than a currency board. A flexible rate system implements the social optimum and eliminates runs, provided the exchange rate and central bank lending policies are appropriately designed.
Subjects: 
Banks and banking
Central
Financial crises
Financial institutions
Foreign exchange rates
Document Type: 
Working Paper

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