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Government Finance in the Wake of Currency Crises

  • Craig Burnside

    (University of Virginia.)

  • Martin Eichenbaum

    (Northwestern, NBER and Federal Reserve Bank of Chicago.)

  • Sergio Rebelo

    (Northwestern, NBER and CEPR)

This paper addresses two questions: (i) how do governments actually pay for the fiscal costs associated with currency crises; and (ii) what are the implications of different fi­nancing methods for post-crisis rates of inflation and depreciation? We study these questions using a general equilibrium model in which a currency crisis is triggered by prospective government defi­cits. We then use our model in conjunction with fiscal data to interpret government fi­nancing in the wake of three recent currency crises: Korea (1997), Mexico (1994) and Turkey (2001).

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File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_501.pdf
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Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 501.

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Length: 66 pages
Date of creation: May 2003
Date of revision:
Handle: RePEc:roc:rocher:501
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University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

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  1. Burstein, Ariel Tomas & Eichenbaum, Martin & Rebelo, Sérgio, 2005. "Modeling Exchange Rate Passthrough After Large Devaluations," CEPR Discussion Papers 5250, C.E.P.R. Discussion Papers.
  2. V. V. Chari & Patrick Kehoe, 1997. "Hot Money," NBER Working Papers 6007, National Bureau of Economic Research, Inc.
  3. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2004. "Large Devaluations and the Real Exchange Rate," RCER Working Papers 513, University of Rochester - Center for Economic Research (RCER).
  4. Giancarlo Corsetti & Bartosz Mackowiak, 2000. "Nominal Debt and the Dynamics of Currency Crises," Working Papers 820, Economic Growth Center, Yale University.
  5. Sweder van Wijnbergen, 1991. "Fiscal Deficits, Exchange Rate Crises and Inflation," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 81-92.
  6. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based-Stabilizations," NBER Working Papers 7862, National Bureau of Economic Research, Inc.
  7. Cochrane, John H, 2001. "Long-Term Debt and Optimal Policy in the Fiscal Theory of the Price Level," Econometrica, Econometric Society, vol. 69(1), pages 69-116, January.
  8. Jeanne, Olivier, 1999. "Currency Crises: A Perspective on Recent Theoretical Developments," CEPR Discussion Papers 2170, C.E.P.R. Discussion Papers.
  9. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2001. "On the fiscal implications of twin crises," Working Paper Series WP-01-02, Federal Reserve Bank of Chicago.
  10. Easterly, William & Schmidt-Hebbel, Klaus, 1991. "The macroeconomics of public sector deficits : a synthesis," Policy Research Working Paper Series 775, The World Bank.
  11. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
  12. Burstein, Ariel Tomas & Eichenbaum, Martin & Rebelo, Sérgio, 2002. "Why Are Rates of Inflation So Low After large Devaluations," CEPR Discussion Papers 3178, C.E.P.R. Discussion Papers.
  13. Corsetti, Giancarlo & Dedola, Luca, 2005. "A macroeconomic model of international price discrimination," Journal of International Economics, Elsevier, vol. 67(1), pages 129-155, September.
  14. 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.
  15. Daniel, Betty C., 2001. "The fiscal theory of the price level in an open economy," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 293-308, October.
  16. Feenstra, Robert C, 1985. "Anticipated Devaluations, Currency Flight, and Direct Trade Controls in a Monetary Economy," American Economic Review, American Economic Association, vol. 75(3), pages 386-401, June.
  17. Persson, Mats & Persson, Torsten & Svensson, Lars E O, 1996. "Debt, Cash Flow and Inflation Incentives: A Swedish Example," CEPR Discussion Papers 1488, C.E.P.R. Discussion Papers.
  18. 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.
  19. Sargent, Thomas J & Wallace, Neil, 1973. "The Stability of Models of Money and Growth with Perfect Foresight," Econometrica, Econometric Society, vol. 41(6), pages 1043-48, November.
  20. Michael P. Dooley & Jeffrey A. Frankel, 2003. "Managing Currency Crises in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number dool03-1, June.
  21. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
  22. Dupor, Bill, 2000. "Exchange rates and the fiscal theory of the price level," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 613-630, June.
  23. Maurice Obstfeld, 1984. "Speculative Attack and the External Constraint in a Maximizing Model of the Balance of Payments," NBER Working Papers 1437, National Bureau of Economic Research, Inc.
  24. Sergio Rebelo & Carlos A. Vegh, 2006. "When Is It Optimal to Abandon a Fixed Exchange Rate?," NBER Working Papers 12793, National Bureau of Economic Research, Inc.
  25. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
  26. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-99.
  27. Daniel, Betty C, 2001. "A Fiscal Theory of Currency Crises," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 969-88, November.
  28. Amartya Lahiri & Carlos A. Vegh, 2003. "Delaying the Inevitable: Interest Rate Defense and Balance of Payments Crises," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 404-424, April.
  29. Giancarlo Corsetti & Luca Dedola, 2002. "Macroeconomics of international price discrimination," Temi di discussione (Economic working papers) 461, Bank of Italy, Economic Research and International Relations Area.
  30. Carlos A. Rodríguez, 1991. "The Macroeconomic Effects of Public Sector Deficits: Argentina," CEMA Working Papers: Serie Documentos de Trabajo. 76, Universidad del CEMA.
  31. repec:ucp:bknber:9780226155401 is not listed on IDEAS
  32. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 835-855.
  33. Morris, Stephen, 1995. "Inflation dynamics and the parallel market for foreign exchange," Journal of Development Economics, Elsevier, vol. 46(2), pages 295-316, April.
  34. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  35. Calvo, Guillermo A, 1987. "Balance of Payments Crises in a Cash-in-Advance Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 19-32, February.
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