The Federal Reserve Board eagle logo links to home page

International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page The Business Cycles of Currency Speculation: A Revision of The Mundellian Framework
Enrique G. Mendoza and Martin Uribe
1998-617  (August 1998)

Abstract:  In his seminal 1960 study on the dynamics of alternative exchange rate regimes, Robert Mundell proposed a theory of balance-of-payments crises in which speculators base their actions on the observed holdings of central bank foreign reserves. We examine the quantitative implications of this view from the perspective of an equilibrium business cycle model in which rational expectations of a devaluation are conditioned on foreign reserves. The model explains some of the empirical regularities of the business cycle associated with temporary fixed-exchange-rate regimes. In turn, these cyclical dynamics validate the agents' expectations by producing devaluation probabilities that resemble those estimated from the data. The model thus aims to explain both the real effects and the collapse of exchange-rate-based stabilizations in a unified framework.

Full paper (308 KB PDF)

Currency crises, balance-of-payments crises, real business cycles

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE

Home | IFDPs | List of 1998 IFDPs
To comment on this site, please fill out our feedback form.
Last update: July 19, 2001