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Twin Crises in Emerging Markets: The Role of Liability Dollarization and Imperfect Competition in Banking
Author(s) -
Luca Alina C.,
Olivero María Pía
Publication year - 2012
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/j.1467-9361.2011.00647.x
Subject(s) - economics , imperfect competition , currency , imperfect , monetary economics , competition (biology) , liability , market structure , emerging markets , empirical evidence , fragility , financial fragility , international economics , financial crisis , macroeconomics , finance , microeconomics , ecology , linguistics , philosophy , epistemology , biology , chemistry
Currency crises in emerging markets have been accompanied by banking crises, with concentration in the market for bank credit increasing after large devaluations. This paper examines how the presence of imperfect competition and liability dollarization in banking shapes the real effects of the just mentioned twin crises. An important gap in the theoretical literature is filled, by being the first paper to provide a model of twin crises in the presence of imperfect competition in banking, and the changes in market structure that occur in the aftermath of crises. Doing so, the analysis is able to reveal that currency devaluations generate more severe twin crises in economies with less competitive banking sectors. This result is consistent with the empirical evidence on the concentration‐fragility view, and it unveils the importance of prudential regulation that focuses on the market structure in banking.