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Bail-Outs, Banking and Currency Crises: A Theoretical Analysis of Basic Model with Close Linkages
(Department of Economics, University of Jos, Jos, Nigeria., 2016) Ojapinwa, T.V
The coincidence of banking and currency crises associated with the financial crisis has drawn renewed attention to the factor linking the two phenomena. This paper analyzed the underlying close links between currency and banking crises following Valesco model. The study argued that the twin-like relationship that exist between currency and banking crises operate through governments' bailout The study also argued that the continued government guarantees for the liabilities of the domestic banking system through governments' budget can consistently deplete bailout reserves and eventually degenerate into a currency failure. This argument is in line with the underlining assumption that, 'whether or not depositors are insured, the public expects governments to intervene to save most depositors from losses when financial intermediaries run into trouble: This implies that the warnings that bailout will not be forthcoming appear to be simply not believable. The study concludes that, bail-outs are an inevitable interconnectedness between currency and banking crises of modern economies.