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Theories of Soft Budget Constraints and the Analysis of Banking Crises

Author

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  • Janet Mitchell
Abstract
This paper proposes a new taxonomy for classifying models of soft budget constraints which allows identification of two classes of models. Distinguishing between these classes of models is useful, as they yield SBCs in differing circumstances and have differing theoretical and policy implications. The taxonomy is used to motivate an area of economic theory in which SBC models can yield novel insights: the analysis of banking crises. A model is presented in which SBCs arising from creditor passivity have implications for the question of the appropriate policy for dealing with bad debts on troubled banks' balance sheets. The paper also compares the implications of the two classes of SBC models for the analysis of banking crises.

Suggested Citation

  • Janet Mitchell, 1999. "Theories of Soft Budget Constraints and the Analysis of Banking Crises," William Davidson Institute Working Papers Series 233, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:1999-233
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    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/39619/3/wp233.pdf
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    Cited by:

    1. Koen Schoors & Konstantin Sonin, 2005. "Passive Creditors," International Finance, Wiley Blackwell, vol. 8(1), pages 57-86, March.
    2. Frydman, R. & Gray, C. & Hessel, M. & Rapaczynski, A., 2000. "The Limits of Discipline: Ownership and Hard Budget Constraints in the Transition Economies," Working Papers 00-02, C.V. Starr Center for Applied Economics, New York University.
    3. Galya Taseva, 2019. "Passivity of Creditors among Non-Financial Enterprises in Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 128-159.
    4. Xu, Cheng-Gang & Maskin, Eric, 2001. "Soft Budget Constraint Theories: From Centralization to the Market," CEPR Discussion Papers 2715, C.E.P.R. Discussion Papers.

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