The Business Cycles of Balance-of-Payment Crises: A Revision of Mundellan Framework

Enrique Mendoza and Martín Uribe ()

No 7045, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In his seminal 1960 article Robert Mundell proposed a model of balance-of-payments crises in which confidence in the continuation of a currency peg depended on the observed holdings of central bank foreign reserves. We examine the implications of a reformulation of this view from the perspective of an equilibrium business cycle model in which the probability of devaluation is an endogenous variable conditioned on foreign reserves. The model explains some business cycle regularities of exchange-rate-based stabilizations while also producing devaluation probabilities that capture some features of devaluation probabilities estimated in the data. The analysis aims to explain both the real effects and the collapse of temporary fixed-exchange-rate regimes in an unified framework, and provides an economic interpretation for the evidence that foreign reserves are a robust leading indicator of currency crises.

JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 1999-03
New Economics Papers: this item is included in nep-dge, nep-ifn and nep-mon
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published as Money, Capital Mobility and Trade: Essays in Honor of Robert A. Mundell, Calvo, G., R. Dorubusch and M. Obstfeld, eds., Cambridge: MIT Press, 2000, forthcoming.

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