Chapter

Fundamentals-Based Models

Michael Chui and Prasanna Gai

in Private Sector Involvement and International Financial Crises

Published in print January 2005 | ISBN: 9780199267750
Published online July 2005 | e-ISBN: 9780191602504 | DOI: http://dx.doi.org/10.1093/0199267758.003.0004
Fundamentals-Based Models

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Explores the role played by fundamental factors in driving financial crises. The model of optimal banking crises by Allen and Gale (1998) is explored in detail, as is the first-generation currency crisis model of Krugman (1979). A key insight is that the welfare costs of crisis are associated with the inefficient liquidation of assets and sub-optimal risk sharing, rather than crises per se.

Keywords: banking crises; currency crises; first-generation crisis models; inefficient liquidation; optimal financial crises

Chapter.  4561 words.  Illustrated.

Subjects: Financial Markets

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