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Credits, Crises, and Capital Controls: A Microeconomic Analysis

Author

Listed:
  • Neeman Zvika

    (Boston University and Hebrew University)

  • Orosel Gerhard Oskar

    (University of Vienna)

Abstract

We analyze the behavior of foreign banks who sequentially provide credit to finance projects in an emerging market. The foreign banks are exposed to both project-risks and the macro-economic risk of a currency crisis, and there are no bailout guarantees. Nevertheless, we show that it is often the case that banks provide too much credit too easily and that this behavior may precipitate the onset of a currency crisis. We demonstrate how the imposition of capital controls in the form of taxes and subsidies on foreign investment may improve the situation. Whereas most of the literature on currency crises focuses its analysis on debtor countries and thus on the borrowers' side, our paper illustrates that the lenders' side also deserves attention.

Suggested Citation

  • Neeman Zvika & Orosel Gerhard Oskar, 2002. "Credits, Crises, and Capital Controls: A Microeconomic Analysis," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 1(1), pages 1-44, August.
    • Handle: RePEc:bpj:bejeap:v:contributions.1:y:2002:i:1:n:6
    DOI: 10.2202/1538-0645.1050
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    References listed on IDEAS

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    1. Anonymous, 0. "Increasing Understanding Of Public Problems And Policies 1997; An Executive Summary; Highlights Of The 1997 National Public Policy Education Conference, Charleston, Sc, September 21-24, 1997," Increasing Understanding of Public Problems and Policies, Farm Foundation.
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    More about this item

    Keywords

    emerging markets; foreign credit; currency crisis; capital controls.;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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