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Fiscal uncertainty and currency crises

Gümüş, İnci (2015) Fiscal uncertainty and currency crises. Review of Development Economics, 19 (4). pp. 957-970. ISSN 1363-6669 (Print) 1467-9361 (Online)

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Official URL: http://dx.doi.org/10.1111/rode.12183

Abstract

Fiscal deficits have been put forward as the main factor in the occurrence of currency crises by the first-generation currency crisis models. While most papers within this framework consider a fiscal deficit that occurs with certainty, in reality an increase in the government's fiscal burden may be an uncertain outcome. This paper introduces a model where there is uncertainty about the occurrence of a fiscal deficit for a finite number of periods, and studies the effects of such uncertainty on the evolution of currency crises. If the fiscal deficit materializes, the government has to abandon the fixed exchange rate regime, as in the standard case. However, the paper shows that the peg becomes unsustainable even if the fiscal deficit never materializes. Therefore, a speculative attack occurs and the fixed exchange rate regime collapses with the mere possibility of a deficit, independently of whether this outcome actually occurs or not.

Item Type:Article
Subjects:H Social Sciences > HB Economic Theory
ID Code:27619
Deposited By:İnci Gümüş
Deposited On:08 Dec 2015 16:20
Last Modified:08 Dec 2015 16:20

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