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Government Guarantees, Investment, and Vulnerability to Financial Crises
Author(s) -
Irwin Gregor,
Vines David
Publication year - 2003
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1046/j.1467-9396.2003.00422.x
Subject(s) - economics , moral hazard , financial crisis , stock (firearms) , monetary economics , government (linguistics) , capital (architecture) , investment (military) , vulnerability (computing) , capital flows , finance , macroeconomics , market economy , mechanical engineering , history , liberalization , linguistics , philosophy , computer security , archaeology , politics , law , computer science , engineering , incentive , political science
The paper presents a new model of the East Asian crisis which combines three elements—moral hazard, investment collapse, and multiple equilibria—in a single account. The study locates the causes of the crisis in poor financial regulation, highly leveraged financial institutions, and implicit guarantees to the financial sector. The model has a unique long‐run equilibrium with overinvestment. But in the short run, in which the capital stock is fixed, there may be multiple equilibria. In a crisis the government is forced to renege on its guarantees; the effect is a rapid reversal of foreign capital flows.