The Breakdown of Credit Relations Under Conditions of a Banking Crisis - A Switching Regime Approach (Electronic book text)

Recent experience has shown how difficult it is to implement an appropriate monetary policy under conditions of banking crises. In particular, distress in the banking sector reduces the ability of the monetary authorities to forecast the demand for credit and liquidity and decisions have to be taken under conditions of imperfect information2. As a result, the authorities' ability to manage liquidity and ensure adequate credit growth could be significantly weakened. At the same time, by disrupting the flow of credit to households and enterprises, a banking crisis affects investment and consumption negatively, and could lead to increased levels of bankruptcy, which worsens further the condition of the banks.