The authors are grateful to Roger Aliaga-Díaz, Cristopher Ball, Bang Jeon, Christopher Laincz, Vibhas Madan, Pietro Peretto, Sangeeta Pratap, Constantinos Syropoulos, and participants at the 2006 Annual Meetings of the Latin American and the Caribbean Economic Association, the 2007 Midwest Theory Meetings, the 2007 Latin American Meetings of the Econometric Society, the 2008 Midwest Macroeconomics Meetings and Villanova School of Business Economics workshop for helpful suggestions.
Twin Crises in Emerging Markets: The Role of Liability Dollarization and Imperfect Competition in Banking
Version of Record online: 16 JAN 2012
© 2012 Blackwell Publishing Ltd
Review of Development Economics
Volume 16, Issue 1, pages 72–94, February 2012
How to Cite
Luca, A. C. and Olivero, M. P. (2012), Twin Crises in Emerging Markets: The Role of Liability Dollarization and Imperfect Competition in Banking. Review of Development Economics, 16: 72–94. doi: 10.1111/j.1467-9361.2011.00647.x
- Issue online: 16 JAN 2012
- Version of Record online: 16 JAN 2012
Currency crises in emerging markets have been accompanied by banking crises, with concentration in the market for bank credit increasing after large devaluations. This paper examines how the presence of imperfect competition and liability dollarization in banking shapes the real effects of the just mentioned twin crises. An important gap in the theoretical literature is filled, by being the first paper to provide a model of twin crises in the presence of imperfect competition in banking, and the changes in market structure that occur in the aftermath of crises. Doing so, the analysis is able to reveal that currency devaluations generate more severe twin crises in economies with less competitive banking sectors. This result is consistent with the empirical evidence on the concentration-fragility view, and it unveils the importance of prudential regulation that focuses on the market structure in banking.