Prospective Deficits and the Asian Currency Crisis

Craig Burnside, Martin Eichenbaum and Sergio Rebelo ()

No 6758, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper argues that the recent Southeast Asian currency crisis was caused by large prospective deficits associated with implicit bailout guarantees to failing banking systems. We articulate this view using a simple dynamic general equilibrium model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises. This is true regardless of the government's foreign reserve position or the initial level of its debt. While the government cannot prevent a speculative attack, it can affect its timing. The longer the delay, the higher inflation will be under flexible exchange rates. We present empirical evidence in support of the three key assumptions in our model: (i) foreign reserves did not play a special role in the timing of the attack, (ii) large losses in the banking sector were associated with large increases in governments' prospective deficits, and (iii) the public knew that banks were in trouble before the currency crisis.

JEL-codes: F31 (search for similar items in EconPapers)
Date: 1998-10
New Economics Papers: this item is included in nep-dge and nep-ifn
Note: EFG IFM
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Citations: View citations in EconPapers (36)

Published as Burnside, Craig, Martin Eichenbaum and Sergio Rebelo. "Prospective Deficits And The Asian Currency Crisis," Journal of Political Economy, 2001, v109(6,Dec), 1155-1197.

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Related works:
Journal Article: Prospective Deficits and the Asian Currency Crisis (2001)
Working Paper: Prospective deficits and the asian currency crisis (1999)
Working Paper: Prospective Deficits and the Asian Currency Crises (1998)
Working Paper: Prospective deficits and the Asian currency crisis (1998)
Working Paper: Prospective Deficits and the Asian Currency Crisis (1998)
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