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PRESENTATION ARCHIVES
  N°139  
Issue Q3 2014  
The impossible trinity and Krugman?s balance of payments crisis model  
Partha Sen
 
The “impossible trinity” refers to the impossibility of the simultaneous presence of a fixed exchange rate regime, uncovered interest parity and the Central Bank?s control over the money supply. I apply this to Krugman?s (1979) balance of payments crisis model, where he argued that there is a unique date on which a crisis occurs. I show that the crisis can occur on any date. The Central Bank may be left with reserves in excess of the level that they wish to defend, which seems consistent with the data. But for the attack to be successful the amount of foreign exchange reserves that the Central Bank will lose on any date is uniquely determined, and is the same as in Krugman (1979). Abstract

   
First generation balance of payments crisis models ; Multiple Equilibria ; Krugman–Flood–Garber model ; Keywords
F30 ; F31 ; F32 ; F40 ; F41 ; JEL classification
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