TY - JOUR AU - Burnside, Craig AU - Eichenbaum, Martin AU - Rebelo, Sergio TI - On the Fiscal Implications of Twin Crises JF - National Bureau of Economic Research Working Paper Series VL - No. 8277 PY - 2001 Y2 - May 2001 DO - 10.3386/w8277 UR - http://www.nber.org/papers/w8277 L1 - http://www.nber.org/papers/w8277.pdf N1 - Author contact info: Craig Burnside Department of Economics Duke University 213 Social Sciences Building Durham, NC 27708-0097 Tel: 919/660-1808 Fax: 919/684-8974 E-Mail: craig.burnside@duke.edu Martin S. Eichenbaum Department of Economics Northwestern University 2003 Sheridan Road Evanston, IL 60208 Tel: 847/491-8232 Fax: 847/491-7001 E-Mail: eich@northwestern.edu Sergio Rebelo Northwestern University Kellogg School of Management Department of Finance Leverone Hall Evanston, IL 60208-2001 Tel: 847/467-2329 Fax: 847/491-5719 E-Mail: s-rebelo@northwestern.edu M1 - published as A. Craig Burnside, Martin S. Eichenbaum, Sergio Rebelo. "On the Fiscal Implications of Twin Crises," in Michael P. Dooley and Jeffrey A. Frankel, editors, "Managing Currency Crises in Emerging Markets" University of Chicago Press (2003) AB - This paper explores the implications of different strategies for financing the fiscal costs of twin crises for inflation and depreciation rates. We use a first-generation type model of speculative attacks which has four key features: (i) the crisis is triggered by prospective deficits; (ii) there exists outstanding non-indexed government debt issued prior to the crises; (iii) a portion of the government's liabilities are not indexed to inflation; and (iv) there are nontradable goods and costs of distributing tradable goods, so that purchasing power parity does not hold. We show that the model can account for the high rates of devaluation and moderate rates of inflation often observed in the wake of currency crises. We use our model and the data to interpret the recent currency crises in Mexico and Korea. Our analysis suggests that the Mexican government is likely to pay for the bulk of the fiscal costs of its crisis through seignorage revenues. In contrast, the Korean government is likely to rely more on a combination of implicit and explicit fiscal reforms. ER -