Prospective Deficits and the Asian Currency Crises

51 Pages Posted: 6 Jan 2005

See all articles by Sergio T. Rebelo

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martin Eichenbaum

Northwestern University; National Bureau of Economic Research (NBER)

A. Craig Burnside

Duke University - Department of Economics; University of Glasgow - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1999

Abstract

The recent Asian currency crisis was caused by large prospective fiscal deficits associated with implicit bailout guarantees to failing banking systems. Absent the political will to raise taxes or cut spending, governments must resort to seignorage revenues to pay for the bailout of the banking system. In a world of forward-looking agents, this makes a currency crisis inevitable.

Burnside, Eichenbaum, and Rebelo argue that the recent Asian currency crisis was caused by large prospective fiscal deficits associated with implicit bailout guarantees to failing banking systems.

They articulate this view using a simple dynamic general equilibrium model, whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises.This is true regardless of the government's foreign reserves position or the initial level of its debt.

The government cannot prevent a speculative attack but it can affect its timing. The longer the delay, the higher inflation will be under flexible exchange rates.

JEL Classification: F31

Suggested Citation

Tavares Rebelo, Sergio and Eichenbaum, Martin and Burnside, Craig, Prospective Deficits and the Asian Currency Crises (March 1999). World Bank Policy Research Working Paper No. 2174; FRB Chicago Working Paper No. 1998-05. Available at SSRN: https://ssrn.com/abstract=130894

Sergio Tavares Rebelo (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
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Evanston, IL 60208
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847-467-2329 (Phone)
847-491-5719 (Fax)

Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Martin Eichenbaum

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8232 (Phone)
847-491-7001 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Craig Burnside

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

University of Glasgow - Department of Economics

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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