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Title | Are Currency Crises Low-State Equilibria? An Empirical, Three-Interest-Rate Model |
Author | Christopher M. Cornell and Raphael H. Solomon |
Type | Working Paper 2006-5 |
Date of publication |
March 2006 |
Language | English |
Abstract |
Suppose that the dynamics of the macroeconomy were given by (partly) random fluctuations between two equilibria: "good" and "bad." One would interpret currency crises (or recessions) as a shift from the good equilibrium to the bad. In this paper, the authors specify a dynamic investment-savings-aggregate-supply (IS-AS) model, determine its closed-form solution, and examine numerically its comparative statics. The authors estimate the model via maximum likelihood, using data for Argentina, Canada, and Turkey. Since the data show no support for the multiple-equilibrium explanation of fluctuations, the authors cast doubt on the third-generation models of currency crisis. |
Bank topic index |
Uncertainty and monetary policy |
JEL classification |
C62, E59, F41 |
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