This paper proposes a theory of twin banking-currency crisis in which both fundamentals and self-fulfilling beliefs play crucial roles. Fundamentals determine whether crises will occur. Self-fulfilling beliefs determine when they occur. The fundamental that causes 'twin crises' is government...

We study the properties of the carry trade, a currency speculation strategy in which an investor borrows low-interest-rate currencies and lends high-interest-rate currencies. This strategy generates payoffs which are on average large and uncorrelated with traditional risk factors. We investigate...

This paper studies the behavior of inflation after nine large post-1990 contractionary devaluations. A salient feature of the data is that inflation is low relative to the rate of devaluation. We argue that the distribution costs and substitution away from imports to lower quality local goods...

This paper explores the implications of different strategies for financng 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...

This paper proposes a theory of twin banking-currency crises in which both fundamentals and self-fulfilling beliefs play crucial roles. Fundamentals determine whether crises will occur. Self-fulfilling beliefs determine when they occur. The fundamental that causes twin crises' is government...

The Real Business Cycle (RBC) research program has grown specularly over the last decade, as its concepts and methods have diffused into mainstream macroeconomics. Yet, there is increasing skepticism that technology shocks are a major source of business fluctuations. This chapter exposits the...

The Real Business Cycle (RBC) research program has grown spectacularly over the last decade, as its concepts and methods have diffused into mainstream macroeconomics. Yet, there is increasing skepticism that technology shocks are a major source of business fluctuations. This chapter exposits the...

The wide cross-country disparity in rates of economic growth is the most puzzling feature of the development process. This paper describes a class of models in which this type of heterogeneity in growth experiences can arise as a result of cross-country differences in government policy. These...