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Public Debt Maturity and Currency Crises

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Author Info
Paul Levine (University of Surrey)
Alexandros Mandilaras (University of Surrey)
Jun Wang (University of Surrey)

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Abstract

This paper provides a theoretical and empirical examination of the e®ect of debt structure on the probability of a currency crisis and the slope of the yield curve. We employ an open-economy version of the Barro-Gordon model with public debt, as in Benigno and Missale (2004) and generalize the analysis to allow for the case where the monetary authority can fully commit itself to an escape clause monetary rule. Comparing the latter with the discretionary outcomes motivates the asymmetric information game where the signalling e®ect of defending the parity competes with the fundamentals of the debt burden. Two key predictions of the model are tested with positive results.

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File URL: http://www.econ.surrey.ac.uk/discussion_papers/2006/DP04-06.pdf
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Publisher Info
Paper provided by Department of Economics, University of Surrey in its series Department of Economics Discussion Papers with number 0406.

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Length: 30 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:sur:surrec:0406

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Related research
Keywords: Currency crisis; debt management;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange

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References listed on IDEAS
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  1. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  2. Drazen, Allan & Masson, Paul R, 1994. "Credibility of Policies versus Credibility of Policymakers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 735-54, August. [Downloadable!] (restricted)
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  3. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August. [Downloadable!] (restricted)
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  4. Benigno, Pierpaolo & Missale, Alessandro, 2004. "High public debt in currency crises: fundamentals versus signaling effects," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 165-188, March. [Downloadable!] (restricted)
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  5. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August. [Downloadable!] (restricted)
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  7. Maurice Obstfeld., 1996. "Destabilizing Effects of Exchange-Rate Escape Clauses," Center for International and Development Economics Research (CIDER) Working Papers C96-075, University of California at Berkeley.
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  8. Backus, David & Driffill, John, 1985. "Rational Expectations and Policy Credibility Following a Change in Regime," Review of Economic Studies, Blackwell Publishing, vol. 52(2), pages 211-21, April. [Downloadable!] (restricted)
  9. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-38, June. [Downloadable!] (restricted)
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