A fiscal theory of currency crises

An exchange rate crisis is caused when the fiscal authority lots the presen t value of primary surpluses, inclusive of seigniorage, deviate from the va lue of government debt at the pegged exchange rate. In the absence of long- term government bonds, the exchange rate collapse must be instantaneous. Wi th longterm government bonds, the collapse can be delayed at the discretion of the monetary authority. Fiscal policy is responsible for the inevitabil ity of a crisis, while monetary policy determines its characteristics, that is, the timing of the crisis and the magnitude of exchange rate depreciati on.