This paper proposes a theory of twin banking-currency crises in which both fundamentals and self-fulfilling beliefs play crucial roles. Fundamentals determine whether crises will occur. Self-fulfilling beliefs determine when they occur. The fundamental that causes twin crises' is government guarantees to domestic banks' foreign creditors. When these guarantees are in place twin crises inevitably occur, but their timing is a multiple equilibrium phenomenon that depends on agents' beliefs. So while self-fulfilling beliefs have an important role to play, twin crises do not happen just anywhere. They happen in countries where there are fundamental problems - problems such as guarantees to the financial sector.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
7554.
Length: Date of creation: Feb 2000 Date of revision: Publication status: published as Burnside, Craig, Martin Eichenbaum and Sergio Rebelo. "Government Guarantees And Self-Fulfilling Speculative Attacks," Journal of Economic Theory, 2004, v119(1,Nov), 31-63. Handle: RePEc:nbr:nberwo:7554
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Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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V.V. Chari & Patrick J. Kehoe, 2003.
"Hot money,"
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228, Federal Reserve Bank of Minneapolis.
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V. V. Chari & Patrick Kehoe, 1997.
"Hot Money,"
NBER Working Papers
6007, National Bureau of Economic Research, Inc.
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V. V. Chari & Patrick J. Kehoe, 2003.
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Levine's Bibliography
506439000000000415, UCLA Department of Economics.
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V. V. Chari & Patrick J. Kehoe, 2003.
"Hot Money,"
Journal of Political Economy,
University of Chicago Press, vol. 111(6), pages 1262-1292, December.
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