By Shanker Satyanath
In a global the place capital strikes freely throughout nationwide borders, constructing nations have more and more been subjected to devastating monetary crises because of the unexpected withdrawal of overseas capital. How do such crises improve? This booklet makes a speciality of a unique causal course: that of miscommunication. through reading the determinants of Asia's monetary main issue of 1997-98, it demonstrates why constructing democracies are exceedingly liable to breakdowns in conversation among monetary officers and the executive government and descriptions the disastrous effects of such breakdowns.
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Extra resources for Globalization, Politics, and Financial Turmoil: Asia's Banking Crisis
In other words, whenever the absolute value of b ≥ 1/4 , the central bank governor is not communicating any useful information to the chief executive. ) Under such circumstances the chief executive simply ignores the central bank governor. In the analysis above, loan defaults were assumed to be uniformly distributed over [0,1] for simplicity of exposition. This, however, is clearly not a realistic assumption and needs to be modified if we want to know the true value of b at which communication becomes completely uninformative.
In the wake of capital flow liberalization, countries are often subjected to substantial exogenous economic shocks that affect the level of expected defaults. A stringent bank regulatory environment would reasonably be one in which the government demands capitalization levels in response to each shock, such that the regulatory response never leaves the banking sector below a moderate level of robustness. A lax bank regulatory environment would be one in which the government demands capitalization levels in response to each shock such that the regulatory response does sometimes leave the banking sector below a moderate level of robustness.
Almost by definition, the legislature does not serve as a check to the chief executive’s power in an authoritarian environment. Thus the authoritarian chief executive is highly unlikely to be constrained from appointing a friend, a long-trusted associate, or a relative who shares his regulatory preferences to the central bank governorship/finance ministership. I call this the orthodox solution to the signaling problem because it does not entail any institutional innovation. Even if considerations of impressing foreign investors or factional considerations generate incentives for an authoritarian chief executive to appoint officials with preferences different from his own to the above positions, the chief executive has an alternative solution to the signaling problem.