On the Fiscal Implications of Twin Crises
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.
|Date of creation:||May 2001|
|Date of revision:|
|Publication status:||published as On the Fiscal Implications of Twin Crises , A. Craig Burnside, Martin S. Eichenbaum, Sergio Rebelo. in Managing Currency Crises in Emerging Markets , Dooley and Frankel. 2003|
|Note:||EFG IFM ME|
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- Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1998.
"Prospective deficits and the Asian currency crisis,"
Working Paper Series
WP-98-5, Federal Reserve Bank of Chicago.
- Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2001. "Prospective Deficits and the Asian Currency Crisis," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1155-1197, December.
- Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1998. "Prospective Deficits and the Asian Currency Crisis," NBER Working Papers 6758, National Bureau of Economic Research, Inc.
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- Michael P. Dooley, 1998.
"A model of crises in emerging markets,"
International Finance Discussion Papers
630, Board of Governors of the Federal Reserve System (U.S.).
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"International Capital Inflows, Domestic Financial Intermediation and Financial Crises under Imperfect Information,"
NBER Working Papers
7902, National Bureau of Economic Research, Inc.
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- Buiter, Willem H., 1986. "Borrowing to Defend the Exchange Rate and the Timing and Magnitude of Speculative Attacks," CEPR Discussion Papers 95, C.E.P.R. Discussion Papers.
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