This paper explores the implications of different strategies for financing 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 crises; (iii) a portion of the government's liabilities are not indexed to inflation; and (iv) there are nontradable goods and costs of distributing tradable goods, so that purchasing power parity does not hold. We show that the model can account for the high rates of devaluation and 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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8277.
Length: Date of creation: May 2001 Date of revision: Publication status: published relationship to a non-chapter. This should not happen. Please contact NBER. Handle: RePEc:nbr:nberwo:8277
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A. Craig Burnside & Martin S. Eichenbaum & Sergio Rebelo, 2003.
"On the Fiscal Implications of Twin Crises,"
NBER Chapters,
in: Managing Currency Crises in Emerging Markets, pages 187-224
National Bureau of Economic Research, Inc.
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Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange
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