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29
Aug
2014

ASIAN CURRENCY CRISIS: Numerical Experiments 3

Since the two calibrated versions of the model display very similar dynamics, we focus our discussion on the Korean case. Figure 1 depicts the dynamic equilibrium paths of ct (which coincides with mt), 7rt, Mt, bt — ft and St (which coincides with Pt) for the model calibrated to the Korean data. Two key features of Figure 1 are worth noting. First, the speculative attack occurs at t* = 2.09, before the change in monetary policy which occurs at T = 3. For the Thai case, t* = 2.41. Second, inflation begins to increase at f*, well before the change in monetary policy. This is reminiscent of classic results in Sargent and Wallace (1981) according to which future monetary policy affects current inflation.

We now turn to the behavior of consumption. In the benchmark model consumption increases discretely at time zero (not displayed in Figure 1) to a level that is higher than both the old steady state (с > с) and the new steady state reached after T (c > c). The fact that с > с results from two features of the equilibrium. First, since seignorage revenues are rebated to the household, the present value of resources available to private agents is the same before and after the increase in the government deficit.

Second, since inflation is at its lowest value before t*. the effective price of consuming during time interval 1 is lower than in all other periods. Figure 1 indicates that during time interval 2 consumption declines. This reflects the rise in inflation relative to time interval 1. During time intervals 3 and 4 consumption is constant because inflation is constant. Notice that с > с because inflation is zero during time interval 1 but positive during time intervals 3 and 4.

Consider next the behavior of the money supply and government debt. In the initial steady state, the level of the money supply is determined by the cash in advance constraint с = M/S. At time 0, consumption jumps from с to c, while the exchange rate remains constant. It follows that the money supply must jump from M to M = Sc. Agents obtain the additional money needed for consumption transactions by trading in foreign reserves or government bonds. Consequently, government debt drops discontinuously at time 0 (not displayed in Figure 1). For the remainder of time interval 1 all model variables remain constant except for government debt which evolves according to:
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At time t* there is a discontinuous decrease in consumption which reflects the jump in inflation that occurs at the onset of the floating exchange rate regime. Since the exchange rate is still fixed at t* the cash in advance constraint implies that the money supply falls discontinuously at the time of the attack. Agents exchange domestic money for foreign reserves or government debt, raising total government liabilities to Ф. It is this decline in domestic money holdings that is often described as a speculative attack. payday loans online reviews

Since the two calibrated versions of the model display very similar dynamics, we focus our discussion on the Korean case. Figure 1 depicts the dynamic equilibrium paths of ct (which coincides with mt), 7rt, Mt, bt — ft and St (which coincides with Pt) for the model calibrated to the Korean data. Two key features of Figure 1 are worth noting. First, the speculative attack occurs at t* = 2.09, before the change in monetary policy which occurs at T = 3. For the Thai case, t* = 2.41. Second, inflation begins to increase at f*, well before the change in monetary policy. This is reminiscent of classic results in Sargent and Wallace (1981) according to which future monetary policy

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Kevin J. Brandon

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