TY  - JOUR
AU  - Mendoza,Enrique G.
AU  - Uribe,Martin
TI  - The Business Cycles of Balance-of-Payment Crises:  A Revision of Mundellan Framework
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7045
PY  - 1999
Y2  - March 1999
UR  - http://www.nber.org/papers/w7045
L1  - http://www.nber.org/papers/w7045.pdf
N1  - Author contact info:
Enrique G. Mendoza
Department of Economics
University of Pennsylvania
3718 Locust Walk
Philadelphia, PA 19104
Tel: 215-898-7701
E-Mail: egme@sas.upenn.edu

Martin Uribe
Department of Economics
Columbia University
International Affairs Building
New York, NY 10027
Tel: 212 851 4008
Fax: 212 854 8059
E-Mail: martin.uribe@columbia.edu
AB  - 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.
ER  -