Since monetary policy is constrained in fixed exchange rate regimes, we should observe fewer banking crises due to moral hazard in countries with credible currency pegs. However, three countries with seemingly credible pegs in the nineteen-eighties and -nineties, namely China, Hong Kong and...

The paper considers the sizes of banking sectors that are vulnerable to runs when the central bank cares about economic stability and currency peg credibility. It is shown that when banks are small, the central bank will recapitalize unhealthy banks because doing so will not compromise its peg....

World financial markets have been in turmoil as investors grapple with the possibility that Greece and perhaps Italy, Ireland, Portugal and Spain will default on their debts. The 2011 downgrade of the S&P outlook for US debt to “negative” suggests that there may eventually be concerns that...