Craig Burnside (World Bank) Martin Eichenbaum (Northwestern University and NBER and Federal Rerserve Chicago) Sergio T. Rebelo () (Northwestern University and NBER and CEPR)
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This paper explores the implications of different strategies for financng 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 crisis; (iii) a portion of the government's liabilities are not indexed to inflation; (iv) there are nontradeable goods and costs of distributing tradeable goods, so that the purchasing power parity does not hold. We show that the model can account for the high rates of devaluation and the 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.
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Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number
482.
Length: 40 pages Date of creation: May 2001 Date of revision: Handle: RePEc:roc:rocher:482
Contact details of provider: Postal: UNIVERSITY OF ROCHESTER, CENTER FOR ECONOMIC RESEARCH, DEPARTMENT OF ECONOMICS, HARKNESS 231 ROCHESTER NEW YORK 14627 U.S.A.
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