Fiscal Deficits and Currency Crises

Marini GiancarloPiersanti Giovanni
CEIS Research Paper
This paper investigates currency and financial crises in an optimizing general equilibrium model. It is shown that a rise in current and expected future budget deficits generates a real exchange rate appreciation and a decumulation of external assets, leading up to a currency crisis when foreign reserves approximate a critical level. Strong empirical support for our model is obtained by a probit estimation for Latin American and Asian countries.
Number: 15
Keywords: budget deficits, foreign exchange reserves, currency crises
JEL codes: F31, F32, F41, E52, E62
Date: Thursday, May 8, 2003
Revision Date: Thursday, May 8, 2003