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Prospective Deficits and the Asian Currency Crises

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  • Burnside, Craig
  • Eichenbaum, Martin
  • Rebelo, Sérgio

Abstract

This paper argues that the recent Southeast Asian currency crises was caused by large prospective deficits associated with implicit bailout guarantees to failing banking systems. We articulate this view using a simple dynamic general equilibrium model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises. This is true regardless of the government's foreign reserve position or the initial level of its debt. While the government cannot prevent a speculative attack, it can affect its timing. The longer the delay, the higher inflation will be under flexible exchange rates. In our model we present empirical evidence in support of the three key assumptions: (i) that foreign reserves did not play a special role in the timing of the attack; (ii) that large losses in the banking sector were associated with large increases in governments' prospective deficits; and (iii) that the public knew that banks were in trouble before the currency rate crises.

Suggested Citation

  • Burnside, Craig & Eichenbaum, Martin & Rebelo, Sérgio, 1998. "Prospective Deficits and the Asian Currency Crises," CEPR Discussion Papers 2015, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2015
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    More about this item

    Keywords

    Asia; banking Crisis; Currency Crisis; Speculative Attacks;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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