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On the Fiscal Implications of Twin Crises

In: Managing Currency Crises in Emerging Markets

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  • A. Craig Burnside
  • Martin S. Eichenbaum
  • Sergio Rebelo

Abstract

This paper explores the implications of different strategies for financng the fiscal costs of twin crises for inflation and depreciation rates. We use a first-generation type model of speculative attacks which has four key features: (i) the crisis is triggered by prospective deficits; (ii) there exists outstanding non-indexed government debt issued prior to the crisis; (iii) a portion of the government's liabilities are not indexed to inflation; (iv) there are nontradeable goods and costs of distributing tradeable goods, so that the purchasing power parity does not hold. We show that the model can account for the high rates of devaluation and the moderate rates of inflation often observed in the wake of currency crises. We use our model and the data to interpret the recent currency crises in mexico and Korea. Our analysis suggests that the Mexican government is likely to pay for the bulk of the fiscal costs of its crisis through seignorage revenues. in contrast, the Korean government is likely to rely more on a combination of implicit and explicit fiscal reforms.

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This chapter was published in:

  • Michael P. Dooley & Jeffrey A. Frankel, 2003. "Managing Currency Crises in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number dool03-1, Ekim.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 9651.

    Handle: RePEc:nbr:nberch:9651

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    1. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2001. "Prospective Deficits and the Asian Currency Crisis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(6), pages 1155-1197, December.
    2. Menzie D. Chinn & Kenneth M. Kletzer, 2000. "International Capital Inflows, Domestic Financial Intermediation and Financial Crises under Imperfect Information," NBER Working Papers 7902, National Bureau of Economic Research, Inc.
    3. Buiter, Willem H., 1987. "Borrowing to defend the exchange rate and the timing and magnitude of speculative attacks," Journal of International Economics, Elsevier, vol. 23(3-4), pages 221-239, November.
    4. Michael P. Dooley, 1997. "A Model of Crises in Emerging Markets," NBER Working Papers 6300, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Frederic S. Mishkin, 2007. "Is Financial Globalization Beneficial?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(2-3), pages 259-294, 03.
    2. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2006. "Government finance in the wake of currency crises," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 401-440, April.
    3. Cruz-Rodriguez, Alexis, 2014. "¿Puede un índice de sostenibilidad fiscal predecir la ocurrencia de crisis cambiarias? Evidencias para algunos países seleccionados
      [Can a fiscal sustainability indicator predict the occurrence of
      ," MPRA Paper 54103, University Library of Munich, Germany.
    4. Corsetti, Giancarlo & Mackowiak, Bartosz, 2006. "Fiscal imbalances and the dynamics of currency crises," European Economic Review, Elsevier, vol. 50(5), pages 1317-1338, July.
    5. Renu Kohli & Kenneth Kletzer, 2001. "Financial Repression and Exchange Rate Management in Developing Countries," IMF Working Papers 01/103, International Monetary Fund.
    6. Craig Burnside, 2004. "The Research Agenda: Craig Burnside on the Causes and Consequences of Twin Banking-Currency Crises," EconomicDynamics Newsletter, Review of Economic Dynamics, Review of Economic Dynamics, vol. 5(2), April.
    7. Irina Stanga, 2011. "Sovereign and Bank Credit Risk during the Global Financial Crisis," DNB Working Papers, Netherlands Central Bank, Research Department 314, Netherlands Central Bank, Research Department.
    8. Richard Hemming & Axel Schimmelpfennig & Michael Kell, 2003. "Fiscal Vulnerability and Financial Crises in Emerging Market Economies," IMF Occasional Papers 218, International Monetary Fund.
    9. Burnside, Craig, 2004. "Currency crises and contingent liabilities," Journal of International Economics, Elsevier, vol. 62(1), pages 25-52, January.

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