Fiscal Deficits and Currency Crises
نویسندگان
چکیده
This paper investigates currency and financial crises in an optimizing general equilibrium model. It is shown that a rise in current and expected future budget deficits generates a real exchange rate appreciation and a decumulation of external assets, leading up to a currency crisis when foreign reserves approximate a critical level. Strong empirical support for our model is obtained by a probit estimation for Latin American and Asian countries. JEL classification: F31; F32; F41; E52; E62
منابع مشابه
Government Finance in the Wake of Currency Crises∗
We address three questions: (i) Can classical models be reconciled with the fact that many crises are marked by high rates of depreciation and small increases in seignorage revenue? (ii) What are the implications of different financing methods for post-crisis rates of inflation and depreciation? (iii) How do governments pay for the fiscal costs associated with currency crises? To study these qu...
متن کاملMacroeconomic Regime Switches and Speculative Attacks
This paper explains a currency crisis as an outcome of a switch in how monetary policy and fiscal policy are coordinated. The paper develops a model of an open economy in which monetary policy starts active, fiscal policy starts passive and, in a particular state of nature, monetary policy switches to passive and fiscal policy switches to active. The probability of the regime switch is endogeno...
متن کاملGovernment guarantees and self-fulfilling speculative attacks
This paper explores the role played by government guarantees to banks’ foreign creditors as a root cause of self-fulfilling twin banking-currency crises. We develop a general equilibrium model in which such guarantees lead to these types of crises. Absent government guarantees, such crises are not possible. The model has three key properties. First, in the presence of government guarantees bank...
متن کاملOp-qjec150023 1727..1780
We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the pres...
متن کاملManaging Currency Pegs
When confronted with the current crisis in peripheral Europe, many specialists in emerging-market macroeconomics feel that it is déjà vu all over again. An implication of this feeling is that in order to understand the current situation in southern Europe, one should dust off the theories of exchange-rate crises that were motivated by the economic experience under fixed exchange rates in Latin ...
متن کامل