Speculative attacks, openness and crises

Aloisio Araujo, Marcia Leon, Rafael Santos
2012 Revista Brasileira de Economia  
In this paper we propose a dynamic stochastic general equilibrium model to evaluate ...nancial adjustments that some emerging market economies went through to overcome external crises during the latest decades, such as default and local currency devaluation. We assume that real devaluation can be used to avoid external debt default, to improve trade balance and to reduce the real public debt level denominated in local currency. Such e¤ects increase the government ability to deal with external
more » ... eal with external crisis, but also have costs in terms of welfare, related to expected in ‡ation, reductions in private investments and higher interest to be paid over the public debt. We conclude that openness improves expected welfare as it allows for a better devaluation-response technology against crises. We also present results for 32 middle-income countries, verifying that the proposed model can indicate, in a stylized way, the preferences for default-devaluation options and the magnitude of the currency depreciation required to overcome 48 external crises occurred as from 1971. Finally, as we construct our model based on the Cole-Kehoe self-ful...lling debt crisis model ([7]), adding local debt and trade, it is important to say that their policy alternatives to leave the crisis zone remains in our extended model, namely, to reduce the external debt level and to lengthen its maturity.
doi:10.1590/s0034-71402012000200001 fatcat:2mi6hic5vrdajmlntpjjntrzpa