Government Budget, Oil Prices and Currency Crisis in Russia

19 Pages Posted: 16 Jun 2011  

Tatiana Kirsanova

University of Glasgow

David Vines

University of Oxford - Balliol College - Department of Economics; Australian National University (ANU); Centre for Economic Policy Research (CEPR)

Date Written: August 21, 2002

Abstract

We present a crisis model which illustrates how oil price shocks led to the resulting collapse of the fixed exchange rate system in Russia. We discuss crucial weaknesses of the Russian economy and argue that the reason it was particularly vulnerable to shocks was that the government and the energy sector were very closely linked. In the model presented an optimizing policymaker abandons a fixed exchange rate regime because he wants to tighten fiscal policy and finance a deteriorating budget deficit. Agents in the foreign exchange market know the policy maker’s objective function and build expectations of a regime switch into interest rate differentials. The resulting rise in interest rates affects the policy maker’s decision to switch the regime. We show that a rational expectations equilibrium exists where it is optimal to abandon the fixed exchange rate regime.

Keywords: currency crisis, speculative attack, rational expectations equilibrium

JEL Classification: E43, F31, F32, P33

Suggested Citation

Kirsanova, Tatiana and Vines, David, Government Budget, Oil Prices and Currency Crisis in Russia (August 21, 2002). Available at SSRN: https://ssrn.com/abstract=1865716 or http://dx.doi.org/10.2139/ssrn.1865716

Tatiana Kirsanova (Contact Author)

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

David Vines

University of Oxford - Balliol College - Department of Economics ( email )

Manor Road
Oxford, OX1 3BJ, Oxfordshire OX13UQ
United Kingdom
+44 1865 271 067 (Phone)
+44 1865 271 094 (Fax)

Australian National University (ANU)

Canberra, Australian Capital Territory
Australia

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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