FISCAL DEFICITS AND CURRENCY CRISES

Giovanni PERSANTI (University of Teramo)
Giancarlo MARINI (University of Rome "Tor Vergata")

This paper investigates currency and financial crises in an optimizing general equlibrium model. It is shown that a rise in current and expected future budget deficits generates a real exchange rate appreciation and a decumulation of external assetes, leading up to a currency crisis when foreign reserves approximate a critical level. Strong empirical suport for our model is obtained by a probit estimation of financial crises for Latin American and Asian countries.