Title : External constraint and financial crises with balance sheet effects.
Author(s) : Meixing Dai
Abstract : This paper investigates the dynamic implications of Krugman’s (1999) model of financial crises with balance-sheet effects, which has a considerable impact on the literature of international financial crisis. Considering explicitly the wealth-accumulation constraint and the external equilibrium condition, I describe an emerging-market financial crisis as a jump from an unstable dynamic trajectory to a stable one, instead of a jump from a “good” to a “bad” equilibrium with zero investment and zero foreign debt. By discriminating the financial crises according to the severity of the negative impacts of some internal and external factors, this paper also adds some insights into the anti-crisis policy.
Key-words : Currency crisis, balance sheet effect, external solvency constraint, financial crisis.
JEL Classification : F31, F32, F41.