On the Fiscal Implications of Twin Crises

40 Pages Posted: 22 May 2001

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)

Multiple version iconThere are 3 versions of this paper

Date Written: April 2001

Abstract

This paper explores the implications of different strategies for financing the fiscal cost 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 suggest that the Mexican government is likely to pay for the bulk of the fiscal costs of its crisis through seignorage revenues. In contrast, the Korean government is likely to rely more on a combination of implicit and explicit fiscal reforms.

Keywords: Currency Crisis, Banking Crisis, Speculative ATtacks, Seignorage, Fiscal Reform, Bailouts

JEL Classification: F31

Suggested Citation

Burnside, Craig and Eichenbaum, Martin and Tavares Rebelo, Sergio, On the Fiscal Implications of Twin Crises (April 2001). Available at SSRN: https://ssrn.com/abstract=267872 or http://dx.doi.org/10.2139/ssrn.267872

Craig Burnside

Duke University - Department of Economics ( email )

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University of Glasgow - Department of Economics

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National Bureau of Economic Research (NBER)

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Martin Eichenbaum (Contact Author)

Northwestern University ( email )

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847-491-8232 (Phone)
847-491-7001 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Sergio Tavares Rebelo

Northwestern University - Kellogg School of Management ( email )

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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