Currency Crises and Foreign Reserves: A Simple Model

24 Pages Posted: 31 Jan 2006

See all articles by Piti Disyatat

Piti Disyatat

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: February 2001

Abstract

This paper addresses the important question of how far a government will run down its stock of foreign reserves in a defense of a fixed exchange rate. An optimizing model of currency crisis is presented in which the decision of whether or not to borrow in a defense of a peg is explicitly analyzed. The threshold level of reserves is then determined endogenously and shown to be a function of fundamental economic variables. The analysis also demonstrates how an increase in the level of reserves, a credit-rating upgrade, or the imposition of capital controls can remove the multiplicity of equilibria.

Keywords: Currency Crisis, Speculative Attacks, Borrowing Reserves

JEL Classification: E50, F30, F32, F32

Suggested Citation

Disyatat, Piti, Currency Crises and Foreign Reserves: A Simple Model (February 2001). IMF Working Paper, Vol. , pp. 1-24, 2001. Available at SSRN: https://ssrn.com/abstract=879353

Piti Disyatat (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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