Self-fulfilling Currency Crises & Corporate Bankruptcies

Riku Kinnunen ()
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Riku Kinnunen: University of Liverpool, Postal: Department of Economics and Accounting, The School of Management,University of Liverpool, Chatham Street, Liverpool, L69 7ZH, Great Britain

No 2001_09, Working Papers from University of Liverpool, Department of Economics

Abstract: In this paper I present a currency crisis model where self- fulfilling devaluation expectations exist if one allows for a corporate bankruptcy. I show that: 1) A self-fulfilling devaluation crisis occurs when the financial intermediary's ability to collect the debt back from a bankrupt firm is at an intermediate region. The crisis coincides with a low output level where the firm goes bankrupt. 2) These crises can be prevented by introducing a conditional flat (Tobin) tax on foreign transactions if and only if domestic interest rates exceed a previously specified level, and tax revenues are distributed to the firm.

Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:liv:livedp:2001_09

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