The Business Cycles of Balance-of-Payment Crises: A Revision of Mundellan Framework / Enrique G. Mendoza, Martin Uribe.

Format:

Book

Author/Creator:

Mendoza, Enrique G.

Contributor:

National Bureau of Economic Research.

Uribe, Martin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7045.

NBER working paper series no. w7045

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

The Business Cycles of Balance-of-Payment Crises

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1999.

Summary:

In his seminal 1960 article Robert Mundell proposed a model of balance-of-payments crises in which confidence in the continuation of a currency peg depended on the observed holdings of central bank foreign reserves. We examine the implications of a reformulation of this view from the perspective of an equilibrium business cycle model in which the probability of devaluation is an endogenous variable conditioned on foreign reserves. The model explains some business cycle regularities of exchange-rate-based stabilizations while also producing devaluation probabilities that capture some features of devaluation probabilities estimated in the data. The analysis aims to explain both the real effects and the collapse of temporary fixed-exchange-rate regimes in an unified framework, and provides an economic interpretation for the evidence that foreign reserves are a robust leading indicator of currency crises.

Notes:

Print version record

March 1999.