POLITICAL DISTORTIONS AND SPREAD OF BANKING CRISES ACROSS THE PACIFIC RIM

Abstract

This paper studies banking crises in a framework where the government can be biased in favor of a “business elite.” When the deposit contract is such that the run on the bank takes place only if the economic system is in a recession, the presence of a “crony” government introduces an element of indeterminacy, i.e. equilibrium can be multiple. Moreover, by means of an information updating mechanism, it is shown that the crisis may spread out to countries “similar” to the one that is examined, i.e. that contagion is possible.

Citation

Vaugirard, V. (2005), "POLITICAL DISTORTIONS AND SPREAD OF BANKING CRISES ACROSS THE PACIFIC RIM", Arbelaez, H. and Click, R.W. (Ed.) Latin American Financial Markets: Developments in Financial Innovations (International Finance Review, Vol. 5), Emerald Group Publishing Limited, Leeds, pp. 249-269. https://doi.org/10.1016/S1569-3767(05)05012-0