Giovanni Piersanti

Current account dynamics and expected future budget deficits: some international evidence

Abstract This paper addresses the question of whether current account deficits are linked to expected future budget deficits. We use an optimizing general equilibrium model to show the theoretical relationship between the two deficits. We then estimate the econometric equation based on the forward-looking expectations model for OECD countries, thus extending earlier research based on more conventional analysis. From the empirical investigation evidence is obtained that strongly supports the view that current account deficits have been associated with expected future budget deficits during the 1970–1997 period.

Fiscal Deficits and Currency Crises

This paper investigates currency and financial crises in an optimizing general equilibrium model. It is shown that a rise in current and expected future budget deficits generates a real exchange rate appreciation and a decumulation of external assets, leading up to a currency crisis when foreign reserves approximate a critical level. Strong empirical support for our model is obtained by a probit estimation for Latin American and Asian countries.

Strategic Interactions and Contagion Effects under Monetary Unions

This paper applies game theory and a cost‐benefit analysis to study voluntary exits and contagion effects in countries joined to a monetary union. The paper looks at two non‐core or periphery countries of a large union and examines the role of structural asymmetries and strategic interactions as determinants of equilibrium outcomes, following both country‐specific and common shocks. The paper finds that under almost symmetry between countries, country‐specific shocks are never associated with multiple equilibria and, if large enough, can spread to other countries leading to contagion. By contrast, common shocks are seen to sustain multiple equilibria if almost‐symmetric countries are considered and to have implications similar to those found in the country‐specific case if large structural asymmetries are admitted.

Models of Speculative Attacks and Crashes in International Capital Markets

Currency and financial turmoils in international capital markets have been the focus of an extensive theoretical research which started around 30 years ago. This paper provides a synthetic overview of this theoretical modeling. We analyze the basic analytical framework corresponding to the dominant theoretical approaches, and discuss their extensions to include the financial sector, contagion across markets and countries, capital flows and borrowing constraints, strategic interactions among agents and equilibrium selection. In the final section we focus on the relevant policy issue of crisis prevention and optimal foreign regime choice in a world of full financial integration.

The Sustainability of Monetary Unions - Can the Euro Survive?

This paper aims to propose a new measure of exchange market pressure for countries operating in hard peg regimes, such as currency unions, currency boards or full dollarization. We use a general model of currency crisis to derive a sustainability index based upon the relationship between the shadow exchange rate and the output gap required to maintain the currency peg. We apply the new index to European Union countries in order to assess the sustainability of the Euro.

Budget Deficits and Exchange-Rate Crises

This paper investigates currency crises in an optimizing general equilibrium model with overlapping generations. It is shown that a rise in government budget deficits financed by future taxes generates a decumulation of external assets, leading up to a speculative attack and forcing the monetary authorities to abandon the peg.