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A Fiscal Perspective on Currency Crises and Original Sin

A Fiscal Perspective on Currency Crises and Original Sin

(p.68) 3 A Fiscal Perspective on Currency Crises and Original Sin
Other People's Money
Giancarlo Corsetti, Bartosz Maćkowiak
University of Chicago Press

This chapter provides an exposition of the synthetic model, highlighting how it enhances one's understanding of the effects of denomination and maturity of public debt more generally. The starting point is the experiment of Paul Krugman, Robert Flood, and Peter Garber in an economy with a fixed exchange rate and public debt (domestic- and foreign-currency, short- and long-term). The chapter postulates an exogenous disturbance that decreases the present value of government's real primary surpluses relative to its outstanding liabilities. It analyzes the dynamics of adjustment and models fiscal policy as non-Ricardian and monetary policy as pursuing an interest rate rule. The chapter summarizes the insights from the synthetic model: insufficient fiscal discipline can undermine currency stability independently of any need for seigniorage revenues. The chapter contributes a simple illustration of this point in the context of a small open-economy model with money introduced in a standard way.

Keywords:   synthetic model, denomination, public debt, Paul Krugman, Robert Flood, Peter Garber, interest rate rule, seigniorage revenues, open-economy model

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