Russian Crisis

6897 Words Nov 29th, 2013 28 Pages
A Case Study of a Currency Crisis: The Russian Default of 1998
Abbigail J. Chiodo and Michael T. Owyang currency crisis can be defined as a speculative attack on a country’s currency that can result in a forced devaluation and possible debt default. One example of a currency crisis occurred in Russia in 1998 and led to the devaluation of the ruble and the default on public and private debt.1 Currency crises such as Russia’s are often thought to emerge from a variety of economic conditions, such as large deficits and low foreign reserves. They sometimes appear to be triggered by similar crises nearby, although the spillover from these contagious crises does not infect all neighboring economies—only those vulnerable to a crisis themselves.
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These models can be grouped into three generations, each of which is intended to explain specific aspects that lead to a currency crisis.
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Kharas, Pinto, and Ulatov (2001) provide a history from a fundamentalsbased perspective, focusing on taxes and public debt issues. We endeavor to incorporate a role for monetary policy. The speculative attack need not be successful to be dubbed a currency crisis. Burnside, Eichenbaum, and Rebelo (2001) show that the government has at its disposal a number of mechanisms to finance the fiscal costs of the devaluation. Which policy is chosen determines the inflationary effect of the currency crisis.

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© 2002, The Federal Reserve Bank of St. Louis.

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REVIEW

First-Generation Models
The first-generation models of a currency crisis developed by Krugman (1979) and Flood and Garber (1984) rely on government debt and the perceived inability of the government to control the budget as the key causes of the currency crisis. These models argue that a speculative attack on the domestic currency can result from an increasing current account deficit (indicating an increase in the trade deficit) or an expected monetization of the fiscal deficit. The speculative attack can result in a sudden devaluation when the central bank’s store of foreign reserves is depleted and it can no
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