On the Fundamentals of Self-Fulfilling Speculative Attacks

48 Pages Posted: 18 Feb 2000 Last revised: 16 Oct 2010

See all articles by A. Craig Burnside

A. Craig Burnside

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

Martin Eichenbaum

Northwestern University; National Bureau of Economic Research (NBER)

Sergio T. Rebelo

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

Date Written: February 2000

Abstract

This paper proposes a theory of twin banking-currency crises in which both fundamentals and self-fulfilling beliefs play crucial roles. Fundamentals determine whether crises will occur. Self-fulfilling beliefs determine when they occur. The fundamental that causes twin crises' is government guarantees to domestic banks' foreign creditors. When these guarantees are in place twin crises inevitably occur, but their timing is a multiple equilibrium phenomenon that depends on agents' beliefs. So while self-fulfilling beliefs have an important role to play, twin crises do not happen just anywhere. They happen in countries where there are fundamental problems - problems such as guarantees to the financial sector.

Suggested Citation

Burnside, Craig and Eichenbaum, Martin and Tavares Rebelo, Sergio, On the Fundamentals of Self-Fulfilling Speculative Attacks (February 2000). NBER Working Paper No. w7554. Available at SSRN: https://ssrn.com/abstract=207648

Craig Burnside

Duke University - Department of Economics ( email )

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University of Glasgow - Department of Economics

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Martin Eichenbaum

Northwestern University ( email )

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National Bureau of Economic Research (NBER)

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Sergio Tavares Rebelo (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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847-467-2329 (Phone)
847-491-5719 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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