Nominal Debt and the Dynamics of Currency Crises

We study the interaction of fiscal and monetary policies during a currency crisis in an economy with government nominal liabilities. We show that the stock and maturity of these liabilities are key determinants of the magnitude, timing and predictability of a devaluation. Among notable features of our model, monetary authorities defend the currency parity conditional on the level of the interest rate, rather than on the stock of international reserves, budget deficits need not be high before a currency crisis, post- devaluation inflation may exhibit little persistence, and money demand need not fall after the crisis.