Roger Barber Butters

The 1990's saw a dramatic shift in the nature of balance of payments crises. Specifically, credit and credit flows became increasingly important as both currencies and financial markets became the targets of speculative attacks in what has come to be termed "Twin Crises". My research contributes to the literature by providing a linkage between the sizes and types of currency attacks, the magnitude of credit flows, and the resulting currency depreciations, fiscal contractions and changes in interest rates. The first chapter of my dissertation theoretically explores the optimal responses of governments and international lenders to incipient balance of payments crises. A modification of a model suggested by Tornell (2000) in which governments seek to minimize the depreciation and unemployment that result from a crisis, my model includes profit maximizing international lenders and credit flows in a Nash bargaining framework. The credit augmented model allows governments faced with crisis to negotiate emergency loan packages in an effort to mitigate the crisis' impact. I solve for the optimal responses of governments and lenders to an incipient crisis and investigate their properties. Utilizing the results developed in the first chapter of my dissertation, I use a cross section of 124 distinct currency crisis episodes to empirically estimate relationships between the components of the balance of payments and crisis induced depreciations and unemployment. I find that there exists a significant relationship between the size of the attack directed at a currency and the resulting depreciation, that this relationship holds regardless of crisis type, and that debt flows play a significant role and are especially significant for credit crisis episodes. In chapter three I investigate the role of the IMF as a international lender of last resort and show that the IMF is both consistent in its lending behavior and responds to market conditions. I also show that the interest rates charged on IMF loans are concessionary by market standards, and that their repayment does not pose a significant burden for countries experiencing temporary balance of payments problems. Economics, Finance.