@techreport{NBERw6469,
 title = "Financial Fragility and the Exchange Rate Regime",
 author = "Roberto Chang and Andres Velasco",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "6469",
 year = "1998",
 month = "March",
 URL = "http://www.nber.org/papers/w6469",
 abstract = {We study financial fragility, exchange rate crises and monetary policy in an open economy model in which banks are maturity transformers as in Diamond-Dybvig.  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 rate and flexible rates, with and without a lender of last resort.  A currency board cannot implement a socially optimal allocation; in addition, under a currency board bank runs are possible.  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.  Larger capital inflows enhance welfare if the no-run equilibrium occurs, but may also render the economy more vulnerable to self-fulfilling runs.  A flexible exchange rate system implements the social optimum and eliminates runs, provided the exchange rate and central bank lending policies of the central bank are appropriately designed.},
}