Currency Crises and Government Finances
Fiscal policy plays a big role in currency crises - before, and after they occur. Thus policymakers should not underestimate the importance of fiscal policy: a) the realization of large contingent liabilities can quickly, and dramatically alter gov...
| Main Author: | |
|---|---|
| Format: | Brief |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2002/05/2011711/currency-crises-government-finances http://hdl.handle.net/10986/11348 |
| Summary: | Fiscal policy plays a big role in
currency crises - before, and after they occur. Thus
policymakers should not underestimate the importance of
fiscal policy: a) the realization of large contingent
liabilities can quickly, and dramatically alter government
finances, leading to a currency crisis; b) the effects of a
currency crisis on government finances depend on the
structure of government revenue, spending, and debt; c) the
fiscal policies adopted in response to a crisis, influence
economic outcomes, especially inflation, and depreciation.
The note reviews the traditional models of currency crises,
explained as a consequence of unsustainable fiscal policy,
and how debt is accumulated, how currency crisis then
develops, and why does fiscal policy matter. Focusing on
bank bailouts, it is argued that traditional models of
currency crises are applicable to emerging markets,
suggesting that deficits after the East Asia financial
crises could have been anticipated given the region's
deteriorating banking systems, but that economic outcomes
largely depend on the mix of financing. |
|---|