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On the Fundamentals of Self-Fulfilling Speculative Attacks

Author

Listed:
  • Eichenbaum, Martin
  • Rebelo, Sérgio
  • Burnside, Craig
Abstract
This paper proposes a theory of twin banking-currency crises in which both fundamentals and self-fulfilling beliefs play crucial roles. Fundamentals determine whether crises will occur. Self-fulfilling beliefs determine when they occur. The fundamental that causes ?twin crises? is government guarantees to domestic banks' foreign creditors. When these guarantees are in place twin crises inevitably occur, but their timing is a multiple equilibrium phenomenon that depends on agents' beliefs. So while self-fulfilling beliefs have an important role to play, twin crises do not happen just anywhere. They happen in countries where there are fundamental problems, such as guarantees to the financial sector.

Suggested Citation

  • Eichenbaum, Martin & Rebelo, Sérgio & Burnside, Craig, 2000. "On the Fundamentals of Self-Fulfilling Speculative Attacks," CEPR Discussion Papers 2565, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2565
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    Cited by:

    1. Aaron Tornell, 2004. "Banks, Bailout Guarantees, and Risky Debt," NBER Chapters, in: Governance, Regulation, and Privatization in the Asia-Pacific Region, pages 425-453, National Bureau of Economic Research, Inc.
    2. Corsetti, Giancarlo & Mackowiak, Bartosz, 2006. "Fiscal imbalances and the dynamics of currency crises," European Economic Review, Elsevier, vol. 50(5), pages 1317-1338, July.
    3. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "A corporate balance-sheet approach to currency crises," Journal of Economic Theory, Elsevier, vol. 119(1), pages 6-30, November.
    4. Nabi, Mahmoud Sami, 2001. "Banking Performance and Speculative Attacks Under Asymmetric Information," MPRA Paper 24515, University Library of Munich, Germany.
    5. V. V. Chari & Patrick J. Kehoe, 2003. "Hot Money," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1262-1292, December.
    6. David A. Marshall, 2001. "The crisis of 1998 and the role of the central bank," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 25(Q I), pages 2-23.
    7. Olli Castren & Tuomas Takalo, 2000. "Capital Market Development, Corporate Governance and the Credibility of Exchange Rate Pegs," Econometric Society World Congress 2000 Contributed Papers 0515, Econometric Society.
    8. Flood, Robert P. & Marion, Nancy P., 2004. "A model of the joint distribution of banking and currency crises," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 841-865, October.
    9. Mundaca, Gabriela, 2003. "Optimal bailout during currency and financial crises: A sequential game analysis," Memorandum 27/2002, Oslo University, Department of Economics.
    10. Alexis Cruz-Rodríguez, 2014. "Is there a relationship between fiscal sustainability and currency crises? International evidence based on causality tests," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Democritus University of Thrace (DUTH), Kavala Campus, Greece, vol. 7(1), pages 69-87, April.
    11. Martin Schneider & Aaron Tornell, 2004. "Balance Sheet Effects, Bailout Guarantees and Financial Crises," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(3), pages 883-913.
    12. Giancarlo Marini & Giovanni Piersanti, 2003. "Fiscal Deficits and Currency Crises," CEIS Research Paper 15, Tor Vergata University, CEIS.
    13. Caprio, Gerard & Honohan, Patrick, 2001. "Finance for Growth: Policy Choices in a Volatile World," MPRA Paper 9929, University Library of Munich, Germany.
    14. Alexis Cruz Rodriguez, 2011. "Prediction of Currency Crises Using a Fiscal Sustainability Indicator," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 26(2), pages 39-60, December.
    15. Mr. Fabian Valencia, 2008. "Banks’ Precautionary Capital and Persistent Credit Crunches," IMF Working Papers 2008/248, International Monetary Fund.
    16. Huberto M. Ennis, 2000. "Banking and the political support for dollarization," Working Paper 00-12, Federal Reserve Bank of Richmond.
    17. Takalo, Tuomas & Castrén, Olli, 2000. "Capital market development, corporate governance and the credibility of exchange rate pegs," Working Paper Series 34, European Central Bank.
    18. Cruz-Rodríguez, Alexis, 2015. "Sostenibilidad fiscal y crisis cambiarias: Un análisis empírico [Fiscal sustainability and currency crises: An empirical analysis]," MPRA Paper 67741, University Library of Munich, Germany.
    19. Cees G. H. Diks & Mr. Dennis P Botman, 2005. "The Role of Domestic and Foreign Investors in a Simple Model of Speculative Attacks," IMF Working Papers 2005/205, International Monetary Fund.
    20. Cruz-Rodriguez, Alexis, 2014. "¿Puede un índice de sostenibilidad fiscal predecir la ocurrencia de crisis cambiarias? Evidencias para algunos países seleccionados [Can a fiscal sustainability indicator predict the occurrence of ," MPRA Paper 54103, University Library of Munich, Germany.

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    More about this item

    Keywords

    Fixed exchange rate regimes; Hedging; Government guarantees; Speculative attacks;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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