Economics at your fingertips  

Speculative attacks, openness and crises

Aloisio Araujo, Marcia Leon and Rafael Santos ()

Revista Brasileira de Economia - RBE, 2012, vol. 66, issue 2

Abstract: In this paper we propose a dynamic stochastic general equilibrium model to evaluate financial adjustments that some emerging market economies went through to overcome external crises during the latest decades, such as default and local currency devaluation. We assume that devaluation can be used to avoid external debt default, to improve trade balance and to reduce the real public debt level denominated in local currency. Such effects increase the government ability to deal with external crisis, but also have costs in terms of welfare, related to expected inflation, reductions in private investments and higher interest to be paid over the public debt. We conclude that openness improves expected welfare as it allows for a better devaluation-response technology against crises. We also present results for 32 middle-income countries, verifying that the proposed model can indicate, in a stylized way, the preferences for default-devaluation options and the magnitude of the currency depreciation required to overcome 48 external crises occurred as from 1971. Finally, as we construct our model based on the Cole-Kehoe self-fulfilling debt crisis model, adding local debt and trade, it is important to say that their policy alternatives to leave the crisis zone remains in our extended model, namely, to reduce the external debt level and to lengthen its maturity.

Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (text/html)

Related works:
Working Paper: Speculative attacks, openness and crises (2007) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Revista Brasileira de Economia - RBE is currently edited by Ricardo Cavalcanti

More articles in Revista Brasileira de Economia - RBE from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil) Contact information at EDIRC.
Bibliographic data for series maintained by Núcleo de Computação da FGV EPGE ().

Page updated 2021-04-08
Handle: RePEc:fgv:epgrbe:v:66:y:2012:i:2:a:3505