Currency Crises and Foreign Reserves: A Simple Model

Author/Editor:

Piti Disyatat

Publication Date:

February 1, 2001

Electronic Access:

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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.

Series:

Working Paper No. 2001/018

Subject:

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

English

Publication Date:

February 1, 2001

ISBN/ISSN:

9781451843644/1018-5941

Stock No:

WPIEA0182001

Pages:

24

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