We modify the Cole and Kehoe model by including domestic debt. According to the original model, a speculative attack on a high debt level issued abroad triggers external debt default. Here, it is possible to inflate away the domestic debt to avoid the external debt default. We consider two...

Resorting to an extension of the debt crisis model of Cole and Kehoe (JIE 1996), we evaluate financial aspects of an optimum currency area. Our focus is to appraise the welfare of a country, which belongs to a monetary union and might suffer a speculative attack on its public debt. A default may...

The purpose of this article is to contribute to the discussion of the financial aspects of dollarization and optimum currency areas. Based on the model of self-fulfilling debt crisis developed by Cole and Kehoe [4], it is possible to evaluate the comparative welfare of economies, which either...