Bank Failures and Fiscal Austerity: Policy Presecriptions for a Developing Country

May 1, 2000

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Andrew Feltenstein. Bank Failures and Fiscal Austerity: Policy Presecriptions for a Developing Country, (USA: International Monetary Fund, 2000) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This work employs a dynamic general equilibrium model to evaluate the causes and implications of bank insolvencies. The model is applied to stylized data from several South Asian countries. It derives conclusions about policy instruments designed to alleviate the impact of insolvencies. Firms are subject to intertemporal solvency conditions, and the public withdraws deposits when borrowers default. If banks optimize by restricting credit to risky borrowers, these failures can be partially avoided. Numerical simulations conclude that the combination of compensating monetary policy and restrictive fiscal policy offers the best way of responding to a bank crisis caused by exogenous shocks.

Subject: Bank deposits, Banking, Commercial banks, Distressed assets, Financial institutions, Financial sector policy and analysis, Government debt management, Labor, Loans, Public financial management (PFM)

Keywords: Bank assets, Bank failures, Bank solvency requirement, Bank specific, Banking system, Central bank, Commercial banks, Defaulted assets, Distressed assets, General equilibrium, Government debt management, Loans, Monetary policy, Optimizing bank behavior, Present value, South Asia, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2000/090
Stock No:

WPIEA0902000
ISBN:

9781451851380
ISSN:

1018-5941

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