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Policy Implications of "Second-Generation" Crisis Models

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Author Info

  • Robert P. Flood

    (International Monetary Fund)

  • Nancy P. Marion

    (International Monetary Fund)

Abstract

After the speculative attacks on government-controlled exchange rates in Europe and in Mexico, economists began to develop models of currency crises with multiple solutions. In these models, a currency crisis occurs when the economy jumps suddenly from one solution to another. This paper examines one of the new models, as presented by Obstfeld (1994), and finds that raising the cost of devaluation may make a crisis more likely. Consequently, slow convergence to a monetary union, which increases the cost to the government of reneging on an exchange rate peg, may be counterproductive. This conclusion is exactly the opposite of that obtained from earlier models.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 44 (1997)
Issue (Month): 3 (September)
Pages: 383-390

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Handle: RePEc:pal:imfstp:v:44:y:1997:i:3:p:383-390

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Cited by:
  1. Claessens, Stijn & Kose, Ayhan, 2013. "Financial Crises: Explanations, Types, and Implications," CEPR Discussion Papers 9329, C.E.P.R. Discussion Papers.
  2. Mundaca,B.G. & Strand,J., 1999. "Speculative attacks in the exchange market with a band policy : a sequential game analysis," Memorandum 01/1999, Oslo University, Department of Economics.
  3. Niko Gobbin & Bruno Merlevede, 2000. "The Russian Crisis: A Debt Perspective," Post-Communist Economies, Taylor & Francis Journals, vol. 12(2), pages 141-163.
  4. International Monetary Fund, 2002. "Financial Crises, Poverty, and Income Distribution," IMF Working Papers 02/4, International Monetary Fund.
  5. M. Isabel Campos López & M. Araceli Rodríguez López, . "Business Cycle Speculative Pressures in a Target Zone," Working Papers on International Economics and Finance 01-04, FEDEA.
  6. Pablo Bustelo & Clara Garcia & Iliana Olivie, 1999. "Global and Domestic Factors of Financial Crises in Emerging Economies: Lessons from the East Asian Episodes (1997-1999)," Working Papers 002, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales.

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