TY  - JOUR
AU  - Chang,Roberto
AU  - Velasco,Andres
TI  - Financial Crises in Emerging Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6606
PY  - 1998
Y2  - June 1998
UR  - http://www.nber.org/papers/w6606
L1  - http://www.nber.org/papers/w6606.pdf
N1  - Author contact info:
Roberto Chang
Rutgers University
Department of Economics
75 Hamilton Street
New Brunswick, NJ  08901
Tel: 732/932-7269
Fax: 732/932-7416
E-Mail: chang@econ.rutgers.edu

Andres Velasco
Columbia University
School of International and Public Affairs
420 West 118th Street
New York, NY 10027
Tel: 212/854-3899
E-Mail: avbranes@gmail.com
AB  - We present a simple model that can account for the main features of recent financial crises in emerging markets.  The international illiquidity of the domestic financial system is at the center of the problem.  Illiquid banks are a necessary and a sufficient condition for financial crises to occur.  Domestic financial liberalization and capital flows from abroad (especially if short term) can aggravate the illiquidity of banks and increase their vulnerability to exogenous shocks and shifts in expectations.  A bank collapse multiplies the harmful effects of an initial shock, as a credit squeeze and costly liquidation of investment projects cause real output drops and collapses in asset prices.  Under fixed exchange rates, a run on banks becomes a run on the currency if the Central Bank attempts to act as a lender of last resort.
ER  -