does one soros make a difference a theory of currency crises with large and small traders do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets to address this issue we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals even abstracting from signaling the presence of the large investor does make all other traders more aggressive in their selling relative to the case in which there is no large investors small investors attach the currency when fundamentals are stronger yet the difference can be small or null depending on the relative precision of private information of the small and large investors adding signaling makes the influence of the large trader on small traders behaviour much stronger

financial contagion through capital connections a model of the origin and spread of bank panics financial contagion is modeled as an equilibrium phenomenon in a dynamic setting with incomplete information and multiple banks the equilibrium probability of bank failure is uniquely determined we explore how the cross holding of deposits motivated by imperfectly correlated regional liquidity shocks can lead to contagious eects conditional on the failure of a financial institution we show that contagion is possible in the unique equilibrium of the economy and characterize exactly when it may exist at the same time we identify a direction of flow for contagious eects which provides a rationale for localized financial panics simulations identify the optimal level of interbank deposit holdings in the presence of contagion risk our results suggest that when the probability of bank failure is low maximal levels of interbank holdings are optimal when cross holding of deposits is complete we demonstrate that the intensity of contagion is increasing in the size of regionally aggregate liquidity shocks

financial fragility and the exchange rate regime abstract we study financial fragility exchange rate crises and monetary policy in a model of an open economy with diamond dybvig banks the banking system the exchange rate regime and central bank credit policy are seen as parts of a mechanism intended to maximize social welfare if the mechanism fails banking crises and speculative attacks on the currency become possible we compare currency boards fixed rates and flexible rates with and without a lender of last resort a currency board cannot implement a social optimum in addition it allows bank runs to occur a fixed exchange rate system may implement the social optimum but is more prone to bank runs and exchange rate crises than a currency board a flexible rate system implements the social optimum and eliminates runs provided that the exchange rate and credit policies of the central bank are appropriately designed journal of economic literature classification numbers f3 e5 g2

contagion of self fulfilling financial crises due to diversification of investment portfolios abstract we look at two countries that have independent fundamentals but share the same group of investors each country might face a self fulfilling crisis agents withdrawing their investments fearing that others will a crisis in one country reduces agents wealth this makes them more averse to the strategic risk associated with the unknown behavior of other agents in the second country increasing their incentive to withdraw their investments consequently the probability of a crisis there increases this generates a positive correlation between the returns in the two countries since diversification affects returns in our model its welfare implications are non trivial

models of currency crises with self fulfilling features the discomfort a government suffers from speculation against its currency determines the strategic incentives of speculators and the scope for multiple currency market equilibria after describing an illustrative model in which high unemployment may cause an exchange rate crisis with self fulfilling features the paper reviews some other self reinforcing mechanisms recent econometric evidence seems consistent with the practical importance of these mechanisms

a model of financial crises in emerging markets recent events in mexico asia russia and brazil have underscored that a satisfactory explanation of financial crises in emerging markets remains elusive not too long ago the prevailing view was that crises were the inevitable outcome of ongoing fiscal imbalances coupled with fixed exchange rates but this first generation view pioneered by krugman 1979 has fallen out of fashion because in many crises the crucial fiscal disequilibria were absent and as obstfeld 1994 has argued currency crises have sometimes occurred even though central banks had more than enough resources to prevent them witness much of europe in the early 1990s obstfeld put forward a second generation view in which central banks may decide to abandon an exchange rate peg when the unemployment costs of defending it become too large this new perspective implied that crises could be driven by self fulfilling expectations since the costs of defending the peg may themselves depend on anticipations that the peg will be maintained but obstfeld s emphasis on mounting unemployment and domestic recession while appropriate for the erm 1992 crisis was at odds with the facts in mexico in 1994 and east asia in 1997 asian

speculative currency attacks with endogenously induced commercial bank crises abstract to date all models of exchange rate crises ignore the existence of a commercial banking sector however if deposit money internal drain is used to purchase foreign exchange external drain then an external drain may give rise to a banking crisis the paper illustrates how an internal drain alters the dynamics of a speculative attack when it results in a cash payments restriction by interrupting the external drain such a restriction postpones devaluation and reduces the size of the initial devaluation the us internal and external drains of 1893 are discussed to provide motivation and support for the model

hedging and financial fragility in fixed exchange rate regimes currency crises that coincide with banking crises tend to share at least three elements first banks have a currency mismatch between their assets and liabilities second banks do not completely hedge the associated exchange rate risk third there are implicit government guarantees to banks and their foreign creditors this paper argues that the first two features arise from banks optimal response to government guarantees we show that guarantees completely eliminate banks incentives to hedge the risk of a devaluation our model also articulates one reason why governments might be tempted to provide guarantees to bank creditors guarantees lower the domestic interest rate and lead to a boom in economic activity but this boom comes at the cost of a more fragile banking system in the event of a devaluation banks renege on foreign debts and declare bankruptcy

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

domestic bank runs and speculative attacks on foreign currencies abstract the paper extends the international transmission of financial crisis literature by illustrating how a domestic bank run can cause a speculative attack on foreign currencies the idea is that when domestic banks invest abroad a domestic bank run will give way to a repatriation of foreign capital if the repatriation causes a depletion of the foreign central bank s foreign exchange reserves then the foreign currency will be devalued as such a devaluation will render domestic banks insolvent in the rational equilibrium domestic bank runs will 1 cause a speculative attack on the foreign currency and 2 be self justified

financial crises and balance of payments crises a simple model of the southern cone experience abstract this paper starts from a simple model of the domestic banking sector and develops the potentially destabilizing macroeconomic consequences of its role in intermediating foreign capital inflows both financial and balance of payments crises may result reminiscent of the southern cone experience

how bad are twins output costs of currency and banking crises we investigate the output effects of banking and currency crises in emerging markets focusing on whether twin crises entail especially large losses recent literature emphasizes the costs of financial crises and suggests that twin crises are particularly damaging to the real economy using a panel data set for 1975 97 we find that currency banking crises are very costly reducing output by about 5 8 8 10 over a 2 4 year period the cumulative loss of both types of crises is therefore very large we do not find however additional feedbacks or interactive effects associated with twin crises further damaging the economy

coordinated bubbles and crashes abstract in a market with information friction investors strategically consider the actions of others and evolutionarily switch between fundamental and technical strategies to maximize their payoffs the collective actions of all investors exert feedback on asset price which affects investors subsequent actions we find that investors have the incentive to adopt fundamental strategy to restore market efficiency only if the mispricing is sufficiently large when investors fail to coordinate on the fundamental strategy market inefficiency increases which blows the bubble as market inefficiency grows the coordination on fundamental strategy strengthens which eventually bursts the bubble

costs of banking system instability some empirical evidence abstract this paper assesses the cross country stylised facts on empirical measures of the losses incurred during periods of banking crises we first consider the direct resolution costs to the government and then the broader costs to the welfare of the economy proxied by losses in gdp we find that the cumulative output losses incurred during crisis periods are large roughly 15 20 on average of annual gdp in contrast to previous research we also find that output losses incurred during crises in developed countries are as high or higher on average than those in emerging market economies moreover output losses during crisis periods in developed countries also appear to be significantly larger 10 15 than in neighbouring countries that did not at the time experience severe banking problems in emerging market economies by contrast banking crises appear to be costly only when accompanied by a currency crisis these results seem robust to allowing for macroeconomic conditions at the outset of crisis in particular low and declining output growth that have also contributed to future output losses during crises episodes

the role of small firms in u s biotechnology clusters the biotechnology industry poses a particular challenge to analysis because its origins were poorly understood or even noticed at the time the purpose of this paper is to examine and make sense of recent developments in the u s biotechnology industry the pioneers and subsequent followers in biotechnology came from other fields they altered their career trajectories in sciences like genetics and medical research to enter an unknown and undefined field which only subsequently became labeled as biotechnology those regions exhibiting the greatest success in developing biotechnology clusters also possessed the greatest ability to unleash the potential commercialization latent in those scientists to generate a successful regional cluster the existence of world class scientific talent is a necessary condition however it is not a sufficient condition the ancillary or complementary factors must also be available to translate this knowledge into a commercialized product the complementary factors include the presence of venture capital and other forms of finance the existence of an entrepreneurial culture and transparent and minimal regulations fostering the start up and growth processes

strategic complementarities and the twin crises the economic literature has emphasized 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 strategic complementarities generates a vicious cycle between banking crises and currency crises this vicious cycle magnifies the correlation between the two crises and destabilizes the economy we discuss some empirical implications and policy implications and in particular show that due to the interaction between the banking sector and the currency market a lender of last resort might not be able to prevent bank runs

coordination failures and the lender of last resort was bagehot right after all the classical doctrine of the lender of last resort lolr elaborated by bagehot 1873 asserts that the central bank should lend to illiquid but solvent banks under certain conditions several authors have argued that this view is now obsolete in modern interbank markets a solvent bank cannot be illiquid this paper provides a possible theoretical foundation for rescuing bagehot s view our theory does not rely on the multiplicity of equilibria that arises in classical models of bank runs we built a model of banks liquidity crises that possesses a unique bayesian equilibrium in this equilibrium there is a positive probability that a solvent bank cannot find liquidity assistance in the market we derive policy implications about banking regulation solvency and liquidity ratios and interventions of the lender of last resort furthermore we find that public bailout and private bail in involvement are complementary in implementing the incentive efficient solution and that bagehot s lender of last resort facility must work together with institutions providing prompt corrective action and orderly failure resolution finally we derive similar implications for an international lender of last resort ilolr jel g21 g28

coordination risk and the price of debt abstract creditors of a distressed borrower face a coordination problem even if the fundamentals are sound fear of premature foreclosure by others may lead to pre emptive action undermining the project recognition of this problem lies behind corporate bankruptcy provisions across the world and it has been identified as a culprit in international financial crises but has received scant attention from the literature on debt pricing without common knowledge of fundamentals the incidence of failure is uniquely determined provided that private information is precise enough this affords a way to price the coordination failure comparative statics on the unique equilibrium provides several insights on the role of information and the incidence of inefficient liquidation

prospective deficits and the asian currency crisis this paper argues that a principal cause of the 1997 asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems the expectation that these future deficits would be at least partially financed by seigniorage revenues or an inflation tax on outstanding nominal debt led to a collapse of the fixed exchange rate regimes in asia we articulate this view using a simple model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises we present empirical evidence in support of the key assumptions underlying our interpretation of the crisis

price policy and food consumption in urban mali abstract this study investigates the food consumption patterns of different income classes in urban areas of mali in order to assess the probable effects on dietary adequacy of the expected increase in the consumer price of rice brought about by food policy reform initiated in 1981 the results are to a degree counterintuitive demonstrating that understanding consumption patterns and their determinants is critical to informed policy making