In this paper, we provide a theoretical explanation of why financial liberalization is likely to generate financial crises in emerging market economies. We first show that under financial repression the aggregate capital stock and bank net worth are both likely to be low. This leads a newly...

This paper combines insights from generation one currency crisis models and the fiscal theory of the price level (FTPL) to create a dynamic FTPL model of currency crises. The initial fixed-exchange-rate policy entails risks due to an upper bound on government debt and stochastic surplus shocks....

Whenever unsustainable current government budget deficits predict future changes in monetary growth through the government's intertemporal budget constraint, fiscal variables become important exchange rate determinants. Failure to understand sustained rates of depreciation, seemingly unjustified...