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Trade Liberalization and Financial Crisis: A Historical Comparison of Chile and the United States

Trade Liberalization and Financial Crisis: A Historical Comparison of Chile and the United States

Chapter:
(p.231) 6 Trade Liberalization and Financial Crisis: A Historical Comparison of Chile and the United States
Source:
Latin American Macroeconomic Reforms
Author(s):
Philip L. Brock
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226302683.003.0008

This chapter explores a potentially important link between trade liberalization and financial crisis that emphasizes the supply of liquidity by the financial system. It proposes that trade liberalization may create an especially fragile structure of long-term bank loans and short-term deposits that is conducive to a financial crisis. The analysis emphasizes the decisions played by central banks following trade liberalizations and leading up to financial crises. To explore empirically the connection between trade liberalization and financial crisis, the chapter examines the experience of the United States in the 1830s and Chile in the 1970s.

Keywords:   liquidity supply, bank loans, short-term deposits, central banks, monetary policy

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