The Business Cycles of Balance-of-Payment Crises: a Revision of Mundellan Framework

49 Pages Posted: 9 Jul 1999 Last revised: 5 May 2000

See all articles by Enrique G. Mendoza

Enrique G. Mendoza

National Bureau of Economic Research (NBER); University of Pennsylvania

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1999

Abstract

In his seminal 1960 article Robert Mundell proposed a model of balance-of-payments crises in which confidence in the continuation of a currency peg depended on the observed holdings of central bank foreign reserves. We examine the implications of a reformulation of this view from the perspective of an equilibrium business cycle model in which the probability of devaluation is an endogenous variable conditioned on foreign reserves. The model explains some business cycle regularities of exchange-rate-based stabilizations while also producing devaluation probabilities that capture some features of devaluation probabilities estimated in the data. The analysis aims to explain both the real effects and the collapse of temporary fixed-exchange-rate regimes in an unified framework, and provides an economic interpretation for the evidence that foreign reserves are a robust leading indicator of currency crises.

Suggested Citation

Mendoza, Enrique G. and Uribe, Martin, The Business Cycles of Balance-of-Payment Crises: a Revision of Mundellan Framework (March 1999). NBER Working Paper No. w7045, Available at SSRN: https://ssrn.com/abstract=157592

Enrique G. Mendoza (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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University of Pennsylvania ( email )

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Martin Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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