Understanding Financial Crises. Franklin Allen and Douglas Gale Clarendon Lectures in Finance June 9-11, 2003. Lecture 2. Currency Crises Franklin Allen University of Pennsylvania June 10, 2003 http://finance.wharton.upenn.edu/~allenf/. Introduction.
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Franklin Allen and Douglas Gale
Clarendon Lectures in Finance
June 9-11, 2003
University of Pennsylvania
June 10, 2003
Major theme of the banking crises literature
From 1945-1971 banking crises were eliminated but currency crises were not
P(t) = P(0) ert
Ln P(t) = Ln P(0) + rt
If the government pegs price at P*, what does the price path look like?
Can’t be an equilibrium because of arbitrage opportunity
Equilibrium: Peg until T’ then there is a run on reserves and the peg is abandoned
There is an exchange rate over time such that the “inflation tax” covers the deficit
Equilibrium has predictable run on reserves and abandonment of peg
Allen and Gale (2000) extends Allen and Gale (1998) to allow for international lending and borrowing
Risk sharing achieved through: