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Fixed Exchange Rates and Banking Crises: When Does the Former Prevent the Latter?
Author(s) -
Miller Victoria
Publication year - 2009
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/j.1468-0300.2009.00213.x
Subject(s) - moral hazard , currency , fixed exchange rates , monetary economics , economics , exchange rate , lender of last resort , exchange rate regime , monetary policy , foreign exchange risk , fixed interest rate loan , interest rate , central bank , incentive , microeconomics
Because monetary policy is constrained in fixed exchange rate regimes, banks should expect fewer money‐financed bailouts and therefore manage their risks more carefully when exchange rates are fixed than when they are flexible. It follows that we should observe fewer banking crises in countries with formal currency pegs. The 1990s however are littered with occurrences of banking crises in countries with fixed exchange rates. This paper asks whether banks in those countries could have adopted excess risk expecting money‐financed bailouts or whether their pegs discouraged such moral hazard‐type risks.