How Can Fiscal Policy Help Avert Currency Crises?

George Kopits

No 2000/185, IMF Working Papers from International Monetary Fund

Abstract: An overview of crisis episodes in emerging-market economies with a pegged exchange rate regime in the 1990s suggests that sizable explicit or implicit government deficits, or market perceptions of lack of fiscal sustainability, render these economies vulnerable to currency crises under high capital mobility. It is argued in the paper that vulnerability to crisis can be mitigated by signaling a phased fiscal adjustment that involves credible implementation of key structural measures. In particular, fiscal policy rules, such as the ones being adopted in a number of emerging-market economies, constitute a potentially useful tool of crisis prevention.

Keywords: WP; authority; crisis; exchange rate; balance of payments; balance of payments crises; fiscal policy; balance-of-payments crisis; stabilization fund; government institution; government control; open economy; government employee; public sector liability; exchange rate rule; Currency crises; Contingent liabilities; Public sector; Eastern Europe; Asia and Pacific (search for similar items in EconPapers)
Pages: 16
Date: 2000-11-01
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Citations: View citations in EconPapers (11)

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