On the Fundamentals of Self-Fulfilling Speculative Attacks

Martin Eichenbaum, Sergio Rebelo () and Craig Burnside

No 2565, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper proposes a theory of twin banking-currency crises in which both fundamentals and self-fulfilling beliefs play crucial roles. Fundamentals determine whether crises will occur. Self-fulfilling beliefs determine when they occur. The fundamental that causes ?twin crises? is government guarantees to domestic banks' foreign creditors. When these guarantees are in place twin crises inevitably occur, but their timing is a multiple equilibrium phenomenon that depends on agents' beliefs. So while self-fulfilling beliefs have an important role to play, twin crises do not happen just anywhere. They happen in countries where there are fundamental problems, such as guarantees to the financial sector.

Keywords: Fixed exchange rate regimes; Hedging; Government guarantees; Speculative attacks (search for similar items in EconPapers)
JEL-codes: F31 F41 G15 G21 (search for similar items in EconPapers)
Date: 2000-09
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Citations: View citations in EconPapers (22)

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Working Paper: On the Fundamentals of Self-Fulfilling Speculative Attacks (2000)
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