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Journal Article

Prospective Deficits and the Asian Currency Crisis

Craig Burnside, Martin Eichenbaum and Sergio Rebelo
Journal of Political Economy
Vol. 109, No. 6 (December 2001), pp. 1155-1197
DOI: 10.1086/323271
Stable URL: http://www.jstor.org/stable/10.1086/323271
Page Count: 43
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Prospective Deficits and the Asian Currency Crisis
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Abstract

This paper argues that a principal cause of the 1997 Asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems. The expectation that these future deficits would be at least partially financed by seigniorage revenues or an inflation tax on outstanding nominal debt led to a collapse of the fixed exchange rate regimes in Asia. We articulate this view using a simple model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises. We present empirical evidence in support of the key assumptions underlying our interpretation of the crisis.

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