Currency Crises and Foreign Reserves: A Simple Model

February 1, 2001

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Format: Chicago

Piti Disyatat. Currency Crises and Foreign Reserves: A Simple Model, (USA: International Monetary Fund, 2001) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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 reserves, a credit-rating upgrade, or the imposition of capital controls can remove the multiplicity of equilibria.

Subject: Central banks, Conventional peg, Currencies, Currency crises, Depreciation, Foreign exchange, International reserves, Money, National accounts, Reserve positions

Keywords: Borrowing Reserves, Capital control, Conventional peg, Currencies, Currency Crisis, Currency defense, Currency parity, Depreciation, Depreciation expectation, Government indifference boundary, International reserves, Nominal exchange rate, Open economy, Peg hinge, Rate of depreciation, Reserve positions, Speculative Attacks, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2001/018
Stock No:

WPIEA0182001
ISBN:

9781451843644
ISSN:

1018-5941

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