This paper argues that the recent Southeast Asian currency crisis was caused by large prospective deficits associated with implicit bailout guarantees to failing banking systems. We articulate this view using a simple dynamic general equilibrium model whose key feature is that a speculative...

Currency crises that coincide with banking crises tend to share four elements. First, governments provide guarantees to domestic and foreign bank creditors. Second, banks do not hedge their exchange rate risk. Third, there is a lending boom before the crises. Finally, when the currency/banking...

This paper investigates the response of real wages and hours worked to an exogenous shock in fiscal policy. We identify this shock with the dynamic response of government purchases and tax rates to an exogenous increase in military purchases. The fiscal shocks that we isolate are characterized...

We present a model embodying moderate amounts of nominal rigidities which accounts for the observed inertia in inflation and persistence in output. The key features of our model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these...

This paper investigates the nature of U.S. fiscal policy in the aftermath of 9/11. We argue that the recent dramatic fall in the government surplus and the large fall in tax rates cannot be accounted for by either the state of the U.S. economy as of 9/11 or as the typical response of fiscal...

Macroeconomic and microeconomic data paint conflicting pictures of price behavior. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model which resolves this apparent micro - macro conflict. Our...

This paper illustrates a particular limited information strategy for assessing the empirical plausibility of alternative quantitative general equilibrium business cycle models. The basic strategy is to test whether a model economy can account for the response of actual economy to an exogenous...

This paper studies the empirical performance of a widely used model of nominal rigidities: the Calvo model of sticky goods prices. We describe an extended version of this model with variable elasticity of demand of the differentiated goods and imperfect capital mobility. We find little evidence...

This paper explores the implications of different strategies for financing the fiscal cost 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...

This paper investigates the consequences of an exogenous increase in U.S. government purchase. We find the in response to such a shock, employment, output, and nonresidential investment rise, while real wages, residential investment and consumption expenditures fall. The paper argues that a...