Currency crisis

All you want to know about Currency crisis

A currency crisis, which is also called a balance-of-payments crisis, occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value. It is a type of financial crisis and is often associated with a real economic crisis. Currency crises can be especially destructive to small open economies or bigger, but not sufficiently stable ones. Governments often take on the role of fending off such attacks by satisfying the excess demand for a given currency using the country's own currency reserves or its foreign reserves (usually in euros or United States dollars).

Recessions attributed to currency crises include the 1997 Asian Financial Crisis and the Argentine economic crisis (1999-2002).

Theories

The currency and sovereign default crises that have occurred with increasing frequency since the Latin American debt crisis of the 1980s have inspired a huge amount of research. There have been several 'generations' of models of currency crises.[1]

The 'first generation' of models of currency crises starts with the paper of Krugman (1979).[2] Krugman argues that a sudden speculative attack on a fixed exchange rate, even though it appears to be an irrational change in expectations, can result from rational behavior by investors who correctly foresee that a government is running an excessive deficit. The deficit causes the government to run out of funds to back its currency at the fixed rate; investors are willing to continue holding the currency as long as they expect the exchange rate to remain fixed, but they flee the currency en masse when they anticipate that the peg is about to end.

The 'second generation' of models of currency crises starts with the paper of Obstfeld and Rogoff (1986).[3] In these models, doubts about whether the government is willing to maintain its exchange rate peg lead to multiple equilibria, suggesting that self-fulfilling prophecies may be possible, in which the reason investors attack the currency is that they expect other investors to attack the currency.

'Third generation' models of currency crises have explored how problems in the banking system interact with currency crises, and how crises can have real effects on the rest of the economy.

See also

References

  1. ^ Craig Burnside, Martin Eichenbaum, and Sergio Rebelo (2008), 'Currency crisis models', New Palgrave Dictionary of Economics, 2nd ed.
  2. ^ Paul Krugman (1979), 'A model of balance-of-payments crises'. Journal of Money, Credit, and Banking 11, pp. 311-25.
  3. ^ Maurice Obstfeld and Kenneth Rogoff (1986), 'Rational and self-fulfilling balance-of-payments crises'. American Economic Review 76 (1), pp. 72-81.


 This economics or finance-related article is a stub. You can help Wikipedia by expanding it.
Retrieved from "http://en.wikipedia.org/wiki/Currency_crisis"

No comments have been added.



Your name:

City:

Country:

Your comments:

Security check *
(Please enter the number into adjoining box)

 
up to content ยป

  • Ads

           
eXTReMe Tracker