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Currency Crises and Foreign Reserves

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  • Piti Disyatat

Abstract

This paper addresses the important question of how far a government will run down its stock of foreign reserves in a defense of a fixed exchange rate. An optimizing model of currency crisis is presented in which the decision of whether or not to borrow in a defense of a peg is explicitly analyzed. The threshold level of reserves is then determined endogenously and shown to be a function of fundamental economic variables. The analysis also demonstrates how an increase in the level of reserves, a credit-rating upgrade, or the imposition of capital controls can remove the multiplicity of equilibria.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/18.

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Length: 24
Date of creation: 01 Feb 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/18

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Related research

Keywords: Foreign exchange reserves; Economic models; capital controls; external borrowing; central bank; domestic currency; currency crisis; currency crises; speculative attacks; capital market; capital mobility; central banks; capital markets; balance of payments; international capital; credit rating; risk aversion; speculative attack; capital outflow; foreign bonds; external finance; international borrowing; domestic credit; international capital markets; repayments; international capital market; private creditors; world capital markets; capital movements; current account adjustment; world capital market; current account; domestic agents; external finances; capital control; domestic bonds; short-term capital; international loan; external debt;

References

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  1. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  2. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1994. "Speculative Attacks on Pegged Exchange Rates: An Empirical Exploration with Special Reference to the European Monetary System," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1060, C.E.P.R. Discussion Papers.
  3. Robert Flood & Nancy Marion, 1998. "Perspectives on the Recent Currency Crisis Literature," NBER Working Papers 6380, National Bureau of Economic Research, Inc.
  4. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  5. Bensaid, Bernard & Jeanne, Olivier, 1997. "The instability of fixed exchange rate systems when raising the nominal interest rate is costly," European Economic Review, Elsevier, Elsevier, vol. 41(8), pages 1461-1478, August.
  6. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, Elsevier, vol. 43(3-4), pages 263-286, November.
  7. Otani, Kiyoshi, 1989. "A collapse of a fixed rate regime with a discrete realignment of the exchange rate," Journal of the Japanese and International Economies, Elsevier, vol. 3(3), pages 250-269, September.
  8. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "The Mexican Peso Crisis: Sudden Death or Death Foretold?," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1760, Harvard - Institute of Economic Research.
  9. Andersen, Torben M, 1994. "Shocks and the Viability of a Fixed Exchange Rate Commitment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 969, C.E.P.R. Discussion Papers.
  10. Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, Elsevier, vol. 41(3-4), pages 235-264, November.
  11. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, Elsevier, vol. 17(1-2), pages 1-13, August.
  12. Ozkan, F Gulcin & Sutherland, Alan, 1995. "Policy Measures to Avoid a Currency Crisis," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 105(429), pages 510-19, March.
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Citations

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Cited by:
  1. Martín Redrado & Jorge Carrera & Diego Bastourre & Javier Ibarlucia, 2006. "The Economic Policy of Foreign Reserve Accumulation: New International Evidence," BCRA Working Paper Series 200614, Central Bank of Argentina, Economic Research Department.
  2. Moser, Thomas, 2003. "What Is International Financial Contagion?," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 6(2), pages 157-78, Summer.
  3. Ramkishen S. Rajan, 2006. "Monetary and Financial Cooperation in Asia : Emerging Trends and Prospects," Finance Working Papers 22125, East Asian Bureau of Economic Research.
  4. Graham Bird & Ramkishen Rajan, 2003. "Too Much of a Good Thing? The Adequacy of International Reserves in the Aftermath of Crises," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 26(6), pages 873-891, 06.
  5. Graham Bird & Ramkishen Rajan, 2002. "The Evolving Asian Financial Architecture," Centre for International Economic Studies Working Papers, University of Adelaide, Centre for International Economic Studies 2002-03, University of Adelaide, Centre for International Economic Studies.
  6. Brahima Coulibaly, 2009. "Currency unions and currency crises: an empirical assessment," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 14(3), pages 199-221.
  7. Martín Redrado & Jorge Carrera & Diego Bastourre & Javier Ibarlucia (ed.), 2006. "The Economic Policy of Foreign Reserve Accumulation: New International Evidence," BCRA Paper Series, Central Bank of Argentina, Economic Research Department, Central Bank of Argentina, Economic Research Department, number 02, June.
  8. David Fernando LOPEZ ANGARITA, 2006. "Nivel óptimo de Reservas Internacionales y crisis cambiaria en Colombia," ARCHIVOS DE ECONOMÍA, DEPARTAMENTO NACIONAL DE PLANEACIÓN 003273, DEPARTAMENTO NACIONAL DE PLANEACIÓN.

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