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A Model of Crises in Emerging Markets

  • Dooley, Michael P

This paper presents a perfect foresight model of speculative attacks on emerging markets. Credit constrained governments are assumed to have two objectives: to accumulate liquid assets in order to self-insure against shocks to national consumption and to insure poorly regulated domestic financial markets. This policy regime generates endogenous fiscal deficits defined to include the growth of contingent liabilities. The model sets out a sequence of yield differentials consistent with capital inflows followed by anticipated speculative attacks. The model suggests that a common shock generated capital inflows to emerging markets in Asia and Latin America after 1989.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 110 (2000)
Issue (Month): 460 (January)
Pages: 256-72

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Handle: RePEc:ecj:econjl:v:110:y:2000:i:460:p:256-72
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  1. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  2. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
  3. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
  4. Caprio, Gerard Jr. & Dooley, Michael & Leipziger, Danny & Walsh, Carl, 1996. "The lender of last resort function under a currency board : the case of Argentina," Policy Research Working Paper Series 1648, The World Bank.
  5. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
  6. Dooley, Michael & Fernandez-Arias, Eduardo & Kletzer, Kenneth & DEC, 1994. "Is the debt crisis history? Recent private capital inflows to developing countries," Policy Research Working Paper Series 1327, The World Bank.
  7. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America; The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
  8. James M. Boughton, 1997. "From Suez to Tequila; The IMF As Crisis Manager," IMF Working Papers 97/90, International Monetary Fund.
  9. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  10. Pierre-Richard Agénor & Jagdeep S. Bhandari & Robert P. Flood, 1992. "Speculative Attacks and Models of Balance of Payments Crises," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 357-394, June.
  11. Dooley, Michael P, 1996. "Capital Controls and Emerging Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 197-205, July.
  12. Robert P. Flood & Nancy P. Marion, 1996. "Speculative Attacks: Fundamentals and Self-Fulfilling Prophecies," NBER Working Papers 5789, National Bureau of Economic Research, Inc.
  13. Wigmore, Barrie A., 1987. "Was the Bank Holiday of 1933 Caused by a Run on the Dollar?," The Journal of Economic History, Cambridge University Press, vol. 47(03), pages 739-755, September.
  14. Rudiger Dornbusch, 1997. "Brazil's Incomplete Stabilization and Reform," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 367-404.
  15. Ilan Goldfajn & Rodrigo O. Valdés, 1997. "Capital Flows and the Twin Crises ; The Role of Liquidity," IMF Working Papers 97/87, International Monetary Fund.
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