TY  - JOUR
AU  - Burnside,Craig
AU  - Eichenbaum,Martin
AU  - Rebelo,Sergio
TI  - Prospective Deficits and the Asian Currency Crisis
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6758
PY  - 1998
Y2  - October 1998
UR  - http://www.nber.org/papers/w6758
L1  - http://www.nber.org/papers/w6758.pdf
N1  - Author contact info:
Craig Burnside
Department of Economics
Duke University
213 Social Sciences Building
Durham, NC 27708-0097
Tel: 919/660-1808
Fax: 919/684-8974
E-Mail: craig.burnside@duke.edu

Martin S. Eichenbaum
Department of Economics
Northwestern University
2003 Sheridan Road
Evanston, IL  60208
Tel: 847/491-8232
Fax: 847/491-7001
E-Mail: eich@northwestern.edu

Sergio Rebelo
Northwestern University
Kellogg School of Management
Department of Finance
Leverone Hall
Evanston, IL  60208-2001
Tel: 847/467-2329
Fax: 847/491-5719
E-Mail: s-rebelo@northwestern.edu
AB  - This paper argues that the recent Southeast Asian currency crisis was caused by large prospective deficits associated with implicit bailout guarantees to failing banking systems.  We articulate this view using a simple dynamic general equilibrium model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises.  This is true regardless of the government's foreign reserve position or the initial level of its debt.  While the government cannot prevent a speculative attack, it can affect its timing.  The longer the delay, the higher inflation will be under flexible exchange rates.  We present empirical evidence in support of the three key assumptions in our model: (i) foreign reserves did not play a special role in the timing of the attack, (ii) large losses in the banking sector were associated with large increases in governments' prospective deficits, and (iii) the public knew that banks were in trouble before the currency crisis.
ER  -