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Strategic Complementarities and the Twin Crises

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  • Itay Goldstein

Abstract

The economic literature emphasised the role of strategic complementarities in generating banking crises and currency crises. Motivated by evidence from recent financial crises, we study a model, where strategic complementarities exist, not only within a group of creditors or within a group of currency speculators, but also between the two groups. The additional type of complementarities generates a vicious circle between banking crises and currency crises. This magnifies the correlation between the two crises and destabilises the economy. We show that, due to the vicious circle, a Lender of Last Resort might not be able to prevent bank runs. Copyright 2005 Royal Economic Society.

Suggested Citation

  • Itay Goldstein, 2005. "Strategic Complementarities and the Twin Crises," Economic Journal, Royal Economic Society, vol. 115(503), pages 368-390, April.
    • Handle: RePEc:ecj:econjl:v:115:y:2005:i:503:p:368-390
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