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Nominal Debt and the Dynamics of Currency Crises

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  • Giancarlo Corsetti
  • Bartosz Mackowiak
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    Abstract

    We study the interaction of fiscal and monetary policies during a currency crisis in an economy with government nominal liabilities. We show that the stock and maturity of these liabilities are key determinants of the magnitude, timing and predictability of a devaluation. Among notable features of our model, monetary authorities defend the currency parity conditional on the level of the interest rate, rather than on the stock of international reserves; budget deficits need not be high before a currency crisis; post- devaluation inflation may exhibit little persistence, and money demand need not fall after the crisis.

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    File URL: http://www.econ.yale.edu/growth_pdf/cdp820.pdf
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    Bibliographic Info

    Paper provided by Economic Growth Center, Yale University in its series Working Papers with number 820.

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    Length: 33 pages
    Date of creation: Oct 2000
    Date of revision:
    Handle: RePEc:egc:wpaper:820

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    Cited by:
    1. Burnside, Craig, 2004. "Currency crises and contingent liabilities," Journal of International Economics, Elsevier, vol. 62(1), pages 25-52, January.
    2. Maltritz, Dominik, 2008. "Modelling the dependency between currency and debt crises: An option based approach," Economics Letters, Elsevier, vol. 100(3), pages 344-347, September.
    3. Corsetti, Giancarlo & Mackowiak, Bartosz, 2006. "Fiscal imbalances and the dynamics of currency crises," European Economic Review, Elsevier, vol. 50(5), pages 1317-1338, July.

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