Russian Banking

Russian Banking

Evolution, Problems and Prospects

New Horizons in Money and Finance series

Edited by David Lane

Russian Banking considers the rise of commercial market-oriented banks in Russia, their links with government and non-financial companies and their role as intermediaries in the provision of finance for investment. The contributors explore the legacy of the Soviet past and current functions of the Russian banking system, contrasting these with those in other post-communist societies and describing peculiarities such as informal networks and corruption.

Chapter 8: Predicting Russia’s Currency and Financial Crises

Sheila A. Chapman and Marcella Mulino


8. Predicting Russia’s currency and financial crises Sheila A. Chapman and Marcella Mulino 1. INTRODUCTION According to one traditional approach currency crises can be explained by either ‘first’- or ‘second-generation’ models. In canonical ‘first-generation’ models (Krugman, 1979; Flood and Garber, 1984; Agénor et al., 1992; Flood and Marion, 2000; Dooley, 2000) crises are explained as the result of a fundamental inconsistency between domestic policies and the attempt to maintain a fixed exchange rate. The original source of problems is a persistent money-financed budget deficit, with the central bank trying to peg the exchange rate using a (limited) stock of foreign exchange reserves. This policy being ultimately unsustainable, foresighted speculators anticipating the inevitable collapse generate a speculative attack on the currency well before reserves are exhausted: when reserves fall to some critical level the central bank is forced to abandon the fixed exchange rate. ‘Second-generation’ models differ from one another in a number of crucial aspects. In general they model situations in which crises do not follow policy inconsistencies but may be explained as self-fulfilling bad outcomes (Obstfeld, 1994; Cole and Kehoe, 1996; Bensaid and Olivier, 1997). Accordingly, governments face a trade-off between policy objectives and choose to abandon a pegged exchange rate once the benefits of maintaining the exchange regime are outweighed by the costs of higher debt or lower output. As the cost of defending a fixed exchange rate grows when expectations that it might be abandoned spread, these models envisage the possibility...

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