Speculative Attacks, Openness and Crises
Revista Brasileira Economia Rio de Janeiro v. 66 n. 2 / p. 135–165 Abr-Jun 2012
31 Pages Posted: 30 Sep 2013
Date Written: June 24, 2012
We extended the Cole and Kehoe model (1996) by adding trade and debt denominated in national currency. We then evaluated some external debt defaults and steep national currency devaluations occurred during last decades. Although default is unlikely, steep devaluation has been repeatedly triggered during ﬁnancial distresses. It helps to over-come ﬁnancial crisis as it improves trade balance and reduces national debt level. On the other hand, expected devaluation hurts welfare through both higher national debt cost and reductions in the investment level. We modeled such trade-offs and showed that trade openness, by and large, improves the expected welfare as it allows for a better devaluation-response technology. We ran model simulations based on past 48 crises occurred in 32 middle-income countries, reasonably ﬁtting devaluation and default responses observed as from 1971.
Keywords: trade-openness, speculative attacks, debt crisis
JEL Classification: F34, F41, H63
Suggested Citation: Suggested Citation