Fiscal Trends and Self‐Fulfilling Crises

Antonio Doblas‐Madrid
Authors registered in the RePEc Author Service: Antonio Doblas-Madrid

Review of International Economics, 2009, vol. 17, issue 1, 187-204

Abstract: This paper develops a second‐generation currency crisis model with endogenously changing fundamentals. Previous second‐generation models are static, e.g. Obstfeld (1994), or dynamic with exogenous paths of fundamentals, e.g. Obstfeld (1986). In our model, the government weighs the disutility of making fundamentals consistent with a peg against a penalty for floating. If the former dominates, the government runs expansionary policies, precipitating a crisis. For some parameters, self‐fulfilling speculation affects when the crisis happens, but not whether it happens. For other values, there are “purely self‐fulfilling” crises, where a peg that could have survived forever collapses if attacked in the first few periods.

Date: 2009
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