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On the fiscal implications of twin crises

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  • On the fiscal implications of twin crises
  • Burnside, Craig; Eichenbaum, Martin; Rebelo, Sergio
  • National Bureau of Economic Research


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Title On the fiscal implications of twin crises
Similar Titles
Material Type Reports
Author(English)

Burnside, Craig; Eichenbaum, Martin; Rebelo, Sergio

Publisher

Cambridge:National Bureau of Economic Research

Date 2001-05
Series Title; No NBER Working Paper Series / 8277
Pages 40
Subject Country Mexico(Americas)
South Korea(Asia and Pacific)
Language English
File Type Link
Original Format pdf
Subject Economy < Financial Policy
Holding National Bureau of Economic Research

Abstract

This paper explores the implications of different strategies for financing 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 crises; (iii) a portion of the government's liabilities are not indexed to inflation; and (iv) there are nontradable goods and costs of distributing tradable goods, so that purchasing power parity does not hold. We show that the model can account for the high rates of devaluation and 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. (The rest omitted)