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The size of banking crises in credible fixed exchange rate regimes

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  • Miller, Victoria
  • Vallée, Luc

Abstract

Since monetary policy is constrained in fixed exchange rate regimes, we should observe fewer banking crises due to moral hazard in countries with credible currency pegs. However, three countries with seemingly credible pegs in the nineteen-eighties and -nineties, namely China, Hong Kong and Argentina, still suffered crises in their domestic banking sectors. The present note illustrates that bank incentives to take on excess risk still exist in countries with currency peg credibility and that the size of that risk exposure (and thus the potential for crisis) may be positively related to the level of central bank foreign exchange reserves.

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  • Miller, Victoria & Vallée, Luc, 2010. "The size of banking crises in credible fixed exchange rate regimes," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1226-1236, November.
    • Handle: RePEc:eee:jimfin:v:29:y:2010:i:7:p:1226-1236
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    Cited by:

    1. Victoria Miller & Luc Vallée, 2011. "Central Bank Balance Sheets and the Transmission of Financial Crises," Open Economies Review, Springer, vol. 22(2), pages 355-363, April.
    2. Victoria Miller, 2014. "A Crisis Transmission Channel for Reserve Currency Countries: A Cautionary Tale," Open Economies Review, Springer, vol. 25(4), pages 809-818, September.

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