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Currency Crises and Foreign Reserves: A Simple Model

Author

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  • Mr. Piti Disyatat
Abstract
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.

Suggested Citation

  • Mr. Piti Disyatat, 2001. "Currency Crises and Foreign Reserves: A Simple Model," IMF Working Papers 2001/018, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2001/018
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    References listed on IDEAS

    as
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    Cited by:

    1. David Fernando LOPEZ ANGARITA, 2006. "Nivel óptimo de Reservas Internacionales y crisis cambiaria en Colombia," Archivos de Economía 3273, Departamento Nacional de Planeación.
    2. Hussin Abdullah & Jauhari Dahalan & Khaw Lee Hwei & Mohammed Umar & Md Mohan Uddin, 2017. "Malaysian Financial Stress Index and Assessing its Impacts on the Economy," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 227-235.
    3. Graham Bird & Ramkishen Rajan, 2003. "Too Much of a Good Thing? The Adequacy of International Reserves in the Aftermath of Crises," The World Economy, Wiley Blackwell, vol. 26(6), pages 873-891, June.
    4. Mr. Sunil Sharma & Woon Gyu Choi & Maria Strömqvist, 2007. "Capital Flows, Financial Integration, and International Reserve Holdings: The Recent Experience of Emerging Markets and Advanced Economies," IMF Working Papers 2007/151, International Monetary Fund.
    5. Thomas Moser, 2003. "What Is International Financial Contagion?," International Finance, Wiley Blackwell, vol. 6(2), pages 157-178, July.
    6. Brahima Coulibaly, 2009. "Currency unions and currency crises: an empirical assessment," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(3), pages 199-221.
    7. Andryakov Alexander & Gurvich Evsey, 2002. "A Model of the Russian Crisis Development," EERC Working Paper Series 02-03e, EERC Research Network, Russia and CIS.
    8. Graham Bird & Ramkishen Rajan, 2002. "The Evolving Asian Financial Architecture," Centre for International Economic Studies Working Papers 2002-03, University of Adelaide, Centre for International Economic Studies.
    9. Ramkishen S. Rajan, 2006. "Monetary and Financial Cooperation in Asia : Emerging Trends and Prospects," Finance Working Papers 22125, East Asian Bureau of Economic Research.
    10. repec:bla:intfin:v:6:y:2003:i:2:p:157-78 is not listed on IDEAS

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