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Fiscal Trends and Self-Fulfilling Crises

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Author Info
Antonio Doblas-Madrid

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Abstract

This paper develops a second-generation currency crisis model with endogenously changing fundamentals. Previous second-generation models are static, e.g. Obstfeld (1994), or dynamic with exogenous paths of fundamentals, e.g. Obstfeld (1986). In our model, the government weighs the disutility of making fundamentals consistent with a peg against a penalty for floating. If the former dominates, the government runs expansionary policies, precipitating a crisis. For some parameters, self-fulfilling speculation affects when the crisis happens, but not whether it happens. For other values, there are "purely self-fulfilling" crises, where a peg that could have survived forever collapses if attacked in the first few periods. Copyright © 2009 The Author. Journal compilation © Blackwell Publishing Ltd 2009.

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File URL: http://www.blackwell-synergy.com/links/doi/10.1111/j.1467-9396.2008.00784.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of International Economics.

Volume (Year): 17 (2009)
Issue (Month): 1 (02)
Pages: 187-204
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Handle: RePEc:bla:reviec:v:17:y:2009:i:1:p:187-204

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This page was last updated on 2009-11-22.

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