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Fiscal Deficits and Currency Crises

  • Giancarlo Marini

    ()

    (University of Rome II - Faculty of Economics)

  • Giovanni Piersanti

    ()

    (University of Rome II - Department of Economics and Law)

This paper investigates currency and financial crises in an optimizing general equilibrium model. It is shown that a rise in current and expected future budget deficits generates a real exchange rate appreciation and a decumulation of external assets, leading up to a currency crisis when foreign reserves approximate a critical level. Strong empirical support for our model is obtained by a probit estimation for Latin American and Asian countries.

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 15.

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Length: 37
Date of creation: 08 May 2003
Date of revision:
Handle: RePEc:rtv:ceisrp:15
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