Currency Crises and Foreign Reserves A Simple Model |
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Author:
| Disyatat, Piti |
Series title: | IMF Working Papers |
ISBN: | 978-1-4518-4364-4 |
Publication Date: | Feb 2001 |
Publisher: | International Monetary Fund
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Book Format: | Paperback |
List Price: | USD $20.00 |
Book Description:
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This paper addresses the important question of how far a government will run down its stock of foreign reserves in a defense of a fixed exchange rate. An optimizing model of currency crisis is presented in which the decision of whether or not to borrow in a defense of a peg is explicitly analyzed. The threshold level of reserves is then determined endogenously and shown to be a function of fundamental economic variables. The analysis also demonstrates how an increase in the level of...
More DescriptionThis paper addresses the important question of how far a government will run down its stock of foreign reserves in a defense of a fixed exchange rate. An optimizing model of currency crisis is presented in which the decision of whether or not to borrow in a defense of a peg is explicitly analyzed. The threshold level of reserves is then determined endogenously and shown to be a function of fundamental economic variables. The analysis also demonstrates how an increase in the level of reserves, a credit-rating upgrade, or the imposition of capital controls can remove the multiplicity of equilibria.