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Prospective Deficits and the Asian Currency Crisis

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Author Info
Craig Burnside
Martin Eichenbaum
Sergio Rebelo

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Abstract

This paper argues that a principal cause of the 1997 Asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems. The expectation that these future deficits would be at least partially financed by seigniorage revenues or an inflation tax on outstanding nominal debt led to a collapse of the fixed exchange rate regimes in Asia. We articulate this view using a simple model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises. We present empirical evidence in support of the key assumptions underlying our interpretation of the crisis.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 109 (2001)
Issue (Month): 6 (December)
Pages: 1155-1197
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Handle: RePEc:ucp:jpolec:v:109:y:2001:i:6:p:1155-1197

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22. [Downloadable!]
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  2. Guillermo A. Calvo & Carlos A. Vegh, 1999. "Inflation Stabilization and BOP Crises in Developing Countries," NBER Working Papers 6925, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank. [Downloadable!]
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  5. 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. [Downloadable!] (restricted)
  6. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
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  7. 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. [Downloadable!] (restricted)
  8. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March. [Downloadable!] (restricted)
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  10. Maurice Obstfeld, 1986. "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. [Downloadable!] (restricted)
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  11. Rebelo, Sergio & Xie, Danyang, 1999. "On the optimality of interest rate smoothing," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 263-282, April. [Downloadable!] (restricted)
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  12. van Wijnbergen, Sweder, 1991. "Fiscal Deficits, Exchange Rate Crises and Inflation," Review of Economic Studies, Blackwell Publishing, vol. 58(1), pages 81-92, January. [Downloadable!] (restricted)
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  13. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 73-96, Fall. [Downloadable!] (restricted)
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  14. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper Tigers? A Model of the Asian Crisis," NBER Working Papers 6783, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall. [Downloadable!]
  16. Atish R. Ghosh & A. Javier Hamann & Timothy D. Lane & Steven Phillips & Marianne Schulze-Gattas & T. M. Tsikata, 1999. "IMF-Supported Programs in Indonesia, Korea and Thailand," IMF Occasional Papers 178, International Monetary Fund. [Downloadable!]
  17. 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. [Downloadable!] (restricted)
  18. Drazen, Allan & Helpman, Elhanan, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 835-55, November. [Downloadable!] (restricted)
  19. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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