Michael Kumhof -- A Quantative Exploration of the Role of Short-Term Domestic Debit in Balance of Payments Crises

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Abstract

The quantitative implications of a model of balance of payments crises are explored. The model analyzes government sterilization of capital outflows through low interest rates on domestic debt. This prevents a collapse in money demand but instead leads to a collapse in bond demand and therefore an increase in central bank domestic credit. The theory's implications are consistent with the Mexican experience of 1994, but much less so with Indonesia in 1997 and Brazil in 1998.