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On the Fiscal Implications of Twin Crises

On the Fiscal Implications of Twin Crises

Chapter:
(p.187) 7 On the Fiscal Implications of Twin Crises
Source:
Managing Currency Crises in Emerging Markets
Author(s):
A. Craig Burnside, Martin Eichenbaum, Sergio Rebelo
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226155425.003.0009

This chapter examines the implications of different strategies for financing the fiscal costs of the twin crises of inflation and currency depreciation in Mexico and Korea in the 1990s using a model in which a currency crisis is triggered by prospective government deficits. It explains the features and capabilities of this model. The analysis reveals that the Mexican government will likely pay for most of the fiscal cost of its crisis by printing money while the Korean government is likely to do so via a mixture of future implicit and explicit fiscal reforms.

Keywords:   twin crises, inflation, currency depreciation, Korea, Mexico, government deficits, fiscal reforms

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