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Public Debt Maturity and Currency Crises

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  • Paul Levine

    (University of Surrey)

  • Alexandros Mandilaras

    (University of Surrey)

  • Jun Wang

    (University of Surrey)

Abstract

This paper provides a theoretical and empirical examination of the e®ect of debt structure on the probability of a currency crisis and the slope of the yield curve. We employ an open-economy version of the Barro-Gordon model with public debt, as in Benigno and Missale (2004) and generalize the analysis to allow for the case where the monetary authority can fully commit itself to an escape clause monetary rule. Comparing the latter with the discretionary outcomes motivates the asymmetric information game where the signalling e®ect of defending the parity competes with the fundamentals of the debt burden. Two key predictions of the model are tested with positive results.

Suggested Citation

  • Paul Levine & Alexandros Mandilaras & Jun Wang, 2006. "Public Debt Maturity and Currency Crises," School of Economics Discussion Papers 0406, School of Economics, University of Surrey.
  • Handle: RePEc:sur:surrec:0406
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    File URL: https://repec.som.surrey.ac.uk/2006/DP04-06.pdf
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    References listed on IDEAS

    as
    1. Benigno, Pierpaolo & Missale, Alessandro, 2004. "High public debt in currency crises: fundamentals versus signaling effects," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 165-188, March.
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    3. Obstfeld, Maurice, 1997. "Destabilizing effects of exchange-rate escape clauses," Journal of International Economics, Elsevier, vol. 43(1-2), pages 61-77, August.
    4. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-538, June.
    5. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    6. Robert J. Barro & David B. Gordon, 2019. "A Positive Theory of Monetary Policy in a Natural Rate Model," Credit and Capital Markets, Credit and Capital Markets, vol. 52(4), pages 505-525.
    7. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    8. David Backus & John Driffill, 1985. "Rational Expectations and Policy Credibility Following a Change in Regime," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 211-221.
    9. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    10. Velasco, Andres, 1996. "Fixed exchange rates: Credibility, flexibility and multiplicity," European Economic Review, Elsevier, vol. 40(3-5), pages 1023-1035, April.
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    Cited by:

    1. Larissa Batrancea, 2020. "The Influence of Public Debt on Performance: Lesson from Romanian Counties," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 809-814, December.

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    More about this item

    Keywords

    Currency crisis; debt management;

    JEL classification:

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

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