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Self-fulfilling Currency Crises & Corporate Bankruptcies

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  • Riku Kinnunen

    (University of Liverpool)

Abstract

In this paper I present a currency crisis model where self- fulfilling devaluation expectations exist if one allows for a corporate bankruptcy. I show that: 1) A self-fulfilling devaluation crisis occurs when the financial intermediary's ability to collect the debt back from a bankrupt firm is at an intermediate region. The crisis coincides with a low output level where the firm goes bankrupt. 2) These crises can be prevented by introducing a conditional flat (Tobin) tax on foreign transactions if and only if domestic interest rates exceed a previously specified level, and tax revenues are distributed to the firm.

Suggested Citation

  • Riku Kinnunen, 2001. "Self-fulfilling Currency Crises & Corporate Bankruptcies," Working Papers 2001_09, University of Liverpool, Department of Economics.
    • Handle: RePEc:liv:livedp:2001_09
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