Journal Article

The crisis of 1998 and the role of the central bank

Abstract: Following the Russian default and devaluation in August 1998, financial markets were characterized by a withdrawal of liquidity, a flight to the safest assets, increased concerns about credit quality, and large declines in asset values. However, the crisis ended following a rather modest interest rate cut by the Federal Reserve. Why did the central bank's action have this effect? This article argues that the crisis was an episode of potential coordination failure, triggered by, but distinct from, the events in Russia. The Federal Reserve's action signaled a policy change that serve to eliminate the coordination failure equilibrium.

Keywords: Financial crises; Banks and banking, Central;

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Economic Perspectives

Publication Date: 2001

Volume: 25

Issue: Q I

Pages: 2-23