Economics
Currency Crisis
A currency crisis occurs when a country's currency experiences a sudden, sharp decline in value, often leading to financial instability. This can be triggered by factors such as high inflation, excessive government debt, or a loss of investor confidence. Currency crises can have significant economic and social impacts, including inflation, unemployment, and reduced living standards for the affected population.
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11 Key excerpts on "Currency Crisis"
eBook - PDFInternational Economics and Business
Nations and Firms in the Global Economy
- Sjoerd Beugelsdijk, Steven Brakman, Harry Garretsen, Charles van Marrewijk(Authors)
- 2013(Publication Date)
- Cambridge University Press(Publisher)
The self-ful fi lling nature of a Currency Crisis applies also to situa-tions where a crisis does not occur. If investors believe the current exchange rate to be the right one for the local currency, their beliefs can turn out to be self-ful fi lling irrespective of the economic conditions that prevail. To get an idea of the relative importance of currency crashes in the past two centuries Figure 9.2 , which is based on the bestselling book of Reinhart and Rogo ff ( 2009 ), depicts the fi ve-year moving average of the share of countries in the world with an annual depreciation of their currency of more than 15 per cent, which is a clear sign of currency problems. Several observations are clear from this fi gure. First, currency crises are a common phenomenon since at least the 1800s. Second, there are large, clustered peaks of turbulence, for example during the Napoleonic wars, the Great 1800 0 10 20 30 40 1830 1860 1890 1920 1950 1980 2010 percent Napoleonic wars Great Depression Asian crisis Figure 9.2 Currency crashes since 1800 Source: based on Reinhart and Rogo ff ( 2009 ); share of countries with an annual depreciation greater than 15 per cent, fi ve-year moving average. Currency crises and exchange rate policy 259 Depression, and the 1990s (particularly the Asian crisis). Third, there seems to be a relative increase in currency crashes over at least the past century, a phenomenon presumably related to increased capital mobility. So far we de fi ned a Currency Crisis in rather general terms as an attack by investors on a fi xed exchange rate that came about because investors lost their con fi dence in the fi xed exchange rate. This de fi nition is too vague for empirical purposes. Eichengreen, Rose, and Wyplosz ( 1995 ) developed a widely used Currency Crisis indicator for empirical research in which a Currency Crisis does not only occur when there is a forced change in the fi xed exchange rate.
eBook - PDF- Henk Jager, Catrinus Jepma(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
These capital flows require a financially open economy, the necessary condition for new-style financial crises, usually currency crises, to occur. A Currency Crisis has a significant impact upon a country’s economy. One indication of the size of the negative effect of currency crises is that in the crisis year the median fall in economic growth in eight crises in the years 1994–98 amounted to some 9 per cent (IMF, 2002, pp. 128–9). It is also notable that, on average, these countries recovered quickly: in the second year following the crisis the average growth rates in these countries had already returned to pre-crisis levels. However, expressed in terms of levels of national production, even in that second year production was still, on average, 9 per cent lower than the level that would have existed without the crisis. Currency Crises 343 This chapter aims to explain the occurrence of currency crises, both theoretically and in practice. Currency crises are a long-standing phenomenon. Their theoretical foundations are to be found in Gresham’s Law, formulated in the sixteenth century, which states that bad money always drives out good money. The essence of the argument is that within a country the private sector will supply overvalued (or bad) currencies in exchange for undervalued (or good) currencies. The latter will then fall out of circulation. Section 18.2 will clarify this rule and show that in essence it is also applicable to international mone-tary relations, and can generate currency crises. Although modern-day currency crises have some similarities with the domestic currency crises of the distant past, there are also con-siderable differences. The section will then go on to describe three different explanations for speculative attacks on currencies.
- R. Rajan(Author)
- 2009(Publication Date)
- Palgrave Macmillan(Publisher)
These 25 coun- tries are selected based on the monograph by Goldstein, Kaminsky and Reinhart (2000), which provides dates of currency and banking crises of the above 25 sample countries. Goldstein et al. (2000) define the date of Currency Crisis as a situation in which an attack on the currency leads to a “substantial reserve loss” Are Crisis-Induced Devaluations Contractionar y? 97 or to a “sharp depreciation of the currency.” Insofar as our five hypoth- eses ought, strictly speaking, to pertain only to a successful specula- tive, i.e. actual devaluation, we consider the case of a Currency Crisis as defined above as well as the case of only a “successful attack,” that is, actual devaluation. We date an attack as “successful” if the percentage change of the exchange rate exceeds 1.65 times one standard deviation of the percentage change of the exchange rate. While many researchers also use 1.65 times one standard deviation of the percentage change of exchange rate as the criteria for defining a crisis, such a technical rule is not without its flaws. Nonetheless, different mechanical criteria, such as using 1.96, do not alter the results significantly . The date of a banking crisis is characterized by two types of events: bank runs that lead to the closure, merger, or takeover by the public sector of one or more financial institutions; and, if there are no bank runs, the closure, merging, takeover, or large-scale government assis- tance of an important financial institution. Admittedly, there may be a selection bias since floating exchange countries and developed coun- tries are excluded. As such, countries like the United Kingdom, which suffered from a Currency Crisis during September 1992, are not listed in Goldstein et al. (2000). The sample initially spans the period 1981 to 1999; annual data is used.
- Jesús Ferreiro, Felipe Serrano, P. Arestis(Authors)
- 2005(Publication Date)
- Palgrave Macmillan(Publisher)
2 On the Changing Nature of Currency Crises Korkut A. Erturk 25 Currency crises have become a common occurrence around the world in the era of capital account liberalization. Following numerous crises in Latin America in the 1980s, speculative attacks on currency wreaked havoc in the Scandinavian countries in the late 1980s, the European Monetary System (EMS) in 1991–2; in Mexico in 1994–5; in East Asia in 1997–8; in Russia in 1998; in Brazil in 1999; and in Argentina and Turkey in 2000–1. And, at the time of writing (April 2005) we may soon face a dollar crisis that will have severe repercussions for the USA and the whole world economy. After each major episode a new generation of crisis models emerged, and, arguably, we still lack a clear understanding of what has remained the same and what was novel in the different episodes of crisis. Despite their many differences, the successive generations of Currency Crisis models can be thought to revolve around the same set of questions. At one level, they appear as a problem of overborrowing made possible by an excessive expansion in bank credit. Often, capital inflow is stimulated by financial liberalization and leads to a credit expansion in the recipient coun- try that is followed sooner or later by a debt problem. Depending on the country, the debt pile-up could be either private or public, and owed to either domestic or foreign investors, but the destabilizing dynamics it sets off appear similar. At yet another level, these crises have resulted from abrupt capital flow reversals caused by capricious shifts in investor sentiment. In the ‘first-generation’ models, the problems of both overborrowing and capital flow reversal were explained by the same mechanism. Monetization of government deficits fuelled an explosive rise in credit supply, giving rise to an unsustainable increase in expenditure and rising prices.
eBook - PDF- Horst Siebert(Author)
- 2009(Publication Date)
- Princeton University Press(Publisher)
IX Avoiding Currency Crises A specific aspect of the instability of the international financial system is exchange rate crises. With the abrupt fall in the external value of a currency, they can cause major damage to the individual country affected by the crisis and they involve the risk of contagion of other economies and endanger the stability of the global financial system with systemic risk. Consequently, rules and institutional arrangements are necessary to reduce the likelihood of such currency crises. It is apparent that national arrangements in favor of a solid and robust banking system and in favor of the solidity of public finances are important preconditions for avoiding currency crises. Therefore all the conditions discussed under the heading of financial stability at home are relevant in preventing currency crises (chapter VIII). These national conditions, however, are not sufficient on an international scale.After all, a Currency Crisis caused by one country can be thought of as a border-crossing negative externality, doing damage to another country, so to say representing a monetary–financial acid rain. It is necessary to prevent such negative spillovers and keep them from developing into a systemic crisis. Moreover, using the same analogy, once a crisis has broken out, it is not too helpful to call upon the polluter-pays principle. The international community must stand by to support the nation affected, just as a doctor must help a patient even if the patient himself has caused his illness. The IMF’s Mission The core goal of a global rule system for financial stability consists in preventing the start and development of such crises, and, once a crisis has begun, to stop it from escalating into a systemic financial crisis of the global economy.
eBook - PDF- Peter J. Montiel(Author)
- 2011(Publication Date)
- Cambridge University Press(Publisher)
Finally, as we saw in Chapter 18, based partly on this experience, some economists have come to the conclusion that there is no combination of domestic policies that can insulate countries with offi-cially determined rates from succumbing to speculative attacks and thus that fixed exchange rates for national currencies are no longer feasible. We will come back to this issue later. The point for now is that the traditional rules of good behav-ior have clearly not been enough to protect countries from the onset of currency crises. c. The Role of Debt Composition Note that the traditional measures of good behavior are all solvency-based macro-economic fundamentals. If these are not sufficient to explain the incidence of currency crises, there are several possibilities. The most obvious one, of course, is that the value of claims on residents of a country can become impaired through means other than general macroeconomic or fiscal insolvency. A crisis may arise not as the result of actual or prospective insolvency but as the result of anticipated policy choices, driven by changes in circumstances, that would have the effect of shifting the burden of taxation toward agents who hold such claims. As we saw in the preceding chapter, a special case would be that of a liquidity crisis, in which the 688 Varieties of Emerging-Market Crises change in circumstances is triggered by the holders of the claims themselves in the form of a panic, as in the case of runs on solvent banks. Models of self-fulfilling speculative attacks triggering currency crises do not exonerate the domestic authorities from responsibility for such attacks, however, because they suggest that these attacks can be successful only if the values of certain macroeconomic fundamentals (the identity of which is model specific) fall within a specific range. One such liquidity-based fundamental is the stock of short-term external liabilities.
eBook - PDFLatin American Economic Crises
Trade and Labour
- E. Bour, D. Heymann, F. Navajas, E. Bour, D. Heymann, F. Navajas(Authors)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
Many countries – Malaysia, Korea and Thailand – suffered large deficits, and in some countries, Thailand and Korea but not Indonesia, the government deficit was a major concern. At a time of crisis, a sudden huge reversal of capital flows (Radelet and Sachs, 1998) occurs. This can be inter- preted as a shift of portfolio preference from assets denominated in local currency to assets denominated in US$. Thus, in considering the economic mechanism of a Currency Crisis, we must consider both the flow and the stock aspect. As the driving force of financial crises, it is probable that the dislocation of stock demand plays a direct and more immediate role than the erosion of flows. For example, Indonesia’s current account deficit was less serious than either Malaysia’s or Thailand’s, but its currency depreciation was greatest. whereas the Philippines with a large current account deficit escaped severe crisis. 1 What made Indonesia’s crisis nearly catastrophic was the sudden shift Hamada: Comparison of Currency Crises 5 Table 1.1 Macroeconomic indicators for selected developing countries (per cent of GDP) Asia Latin America 1983–89 1990–94 1983–89 1990–94 Real GDP 6.2 5.5 3.1 3.5 Consumer prices 6.9 8.4 193.7 222.5 Money growth 20.0 18.1 200.5 258.1 Private consumption 62.8 58.5 64.4 68.0 Private saving 16.8 22.4 18.6 13.5 Fiscal balance 4.8 2.8 5.6 0.1 Current account balance 1.9 2.7 0.9 2.4 Real effective exchange rate 6.3 3.0 0.8 4.3 Total net capital inflow 2.0 4.1 1.7 1.4 Change in reserves 0.4 1.9 0.3 1.2 Total saving 24.0 28.0 19.2 18.6 Total investment 25.9 30.7 20.1 20.0 Notes: Asia includes India, Indonesia, Korea, Malaysia, the Philippines, Thailand; Latin America includes Argentina, Brazil, Chile, Colombia, Mexico, Peru. Source: IMF World Economic Outlook (various issues). in asset preferences ignited by a loss of confidence in political and economic stability.
eBook - PDF- Seiichi Masuyama, Donna Vandenbrink, Siow Yue Chia(Authors)
- 2000(Publication Date)
- ISEAS Publishing(Publisher)
FROM CURRENCY TO ECONOMIC CRISIS 1 © 2000 Institute of Southeast Asian Studies, Singapore 1 From Currency to Economic Crisis 1 Yoopi Abimanyu INTRODUCTION From August 1997 the Indonesian rupiah was profoundly shocked by currency fluctuation. As of the first quarter of 1998, the rupiah had depreciated much further than other currencies in the region. This currency shock was unanticipated (Radelet and Sachs 1998 b ). At its onset, the depreciation of the rupiah was widely viewed as contagion from other Asia-Pacific countries, as Indonesia’s macroeconomic fundamentals were considered sound (Chan 1997). According to this view, the behaviour of the rupiah was mostly due to the movement of other Asia-Pacific currencies. Announcements by public officials that added to domestic political uncertainty exacerbated the depreciation of the rupiah. The Currency Crisis led to economy-wide deterioration. By late 1998 Indonesia ’s economic condition had stabilised somewhat due in part to steps taken in the fiscal, monetary, and banking sectors and to the government’s efforts to maintain a stable exchange rate. This chapter aims to document the currency and economic crises that stand in the way of Indonesia’s return to dynamic economic growth. First, it describes the unfolding of the Currency Crisis in Indonesia and investigates the empirical connection of contagion and political announcement effects to the drastic fall in the rupiah. Then, it describes Indonesia’ s macro-economic crisis in terms of negative growth, high inflation, and balance of payments problems, and the economic conditions in the fiscal and monetary sector, the banking sector, and the exchange rate. ISEAS DOCUMENT DELIVERY SERVICE . No reproduction without permission of the publisher: Institute of Southeast Asian Studies, 30 Heng Mui Keng Terrace, SINGAPORE 119614. FAX: (65)7756259; TEL: (65) 8702447; E-MAIL: [email protected]
eBook - PDFThe Economics of Adjustment and Growth
Second Edition
- Pierre-Richard Agénor, Pierre-Richard Agénor(Authors)
- 2004(Publication Date)
- Harvard University Press(Publisher)
In a subsequent study they also found that banking crises are more likely to occur in liberalized fi nancial systems (Demirgüç-Kunt and Detra-giache, 2001) and in countries with explicit deposit insurance (Demirgüç-Kunt and Detragiache, 2002). 28 The latter e ect is all the more important in countries where bank interest rates are deregulated and the institutional environment is weak. Kamin, Schindler, and Samuel (2001), in a study of 26 currency crises over the period 1981-1999, found that whereas domestic factors (such as credit expansion and fi scal de fi cits) were on average the main source of underlying vulnerability in most individual cases, adverse movements in external factors (such as world interest rates or the terms of trade) and external imbalances (as measured by the current account de fi cit) contributed to a larger extent to increases in crisis probabilities estimated during actual crisis years. Berg and Pattillo (1999) assessed the ability of several empirical models of currency crises–including those of Kaminsky, Lizondo, and Reinhart (1998) and Sachs, Tornell, and Velasco (1996 b )–to predict the Asian exchange rate crises that started with the collapse of the Thai baht reviewed earlier. They concluded that although none of the models reliably predicted the timing of the crises, they did have some value in the sense that variables such as a high credit growth rate, an overvalued exchange rate, and a high ratio of broad money to reserves did positively a ect the probability of a crisis. They concluded that although accurately predicting currency crises remains a di cult (if not 28 This, of course, is an argument not against fi nancial liberalization per se , but rather against premature liberalization, because it is conducive to instability. See Chapter 15. 338 Chapter 8 impossible) task, there are some indicators that policymakers should monitor closely–most notably movements in the real exchange rate.
eBook - PDFPlaying Monopoly with the Devil
Dollarization and Domestic Currencies in Developing Countries
- Manuel Hinds(Author)
- 2008(Publication Date)
- Yale University Press(Publisher)
There are three keys to resolve these puzzles. First is the order in which the two dimensions of the crises started: As in Latin America, the currency runs preceded the financial crises by an ample margin. In fact, the currency runs started simultaneously as soon as the Thai baht collapsed, while the financial crises appeared after a lag that varied across the countries. This, the close synchronicity of the currency runs in the different countries, is the second key. A study conducted by International Monetary Fund (IMF) staff shows that a 1 percentage average depreciation of the currencies of the four other The Currency Origins of Financial Crises 151 countries was associated with a 0.38 percent depreciation of any of the coun-tries’ own exchange rates (the sample contained Indonesia, Korea, Malaysia, the Philippines, and Thailand). Equally, a fall of 1 percent in the average stock market prices of the other four countries was associated with a fall of 0.64 percent in the countries’ own stock prices a day later. 3 The third key is that the financial crises appeared in all countries only after the currency was devalued, sending to illiquidity and insolvency not only the companies that had borrowed in dollars and the banks that had financed their local currency loans with short-term dollar obligations but also those that had borrowed in the local currency and faced higher interest rates and a collapse in demand. That is, contagion went from one country to the others through the weakness of their local currencies. This was the triggering event. In Thailand, the classic boom went from 1993 to 1996, largely caused by an excessively expansionary monetary policy combined with a fixed exchange rate. This attracted enormous amounts of capital flows to the country.
eBook - ePubFrom free trade to globalization
Uncovering the mist of 21st century
- José Alberto Pérez Toro(Author)
- 2016(Publication Date)
- Universidad Jorge Tadeo Lozano(Publisher)
The issue has not gone unnoticed to the director of the Federal Reserve Bank, agency that exalts the danger that poses for foreign investors, direct your savings to the American nation against the fact that there is a decrease in returns on your investment in dollar-denominated assets. With the advent of the Crisis of 2008, the trend of the Federal Reserve Bank has been the reduced to zero interest rate, limited this variable to represent the interbank rate and thus preserve a fall in the return on the investments in securities values.This circumstance of the depreciation of the dollar and interest rates decline has motivated many bankers to reconstitute their portfolios of international reserves, putting for sale financial assets in dollars in Exchange for the purchase of other currencies, whose volatility may be less scattered or opposite to the medium of Exchange. In terms of portfolio theory, this means a less exposure to risk in the basket of currencies and a prudent expectation for better returns. With the advent of the Euro crisis, this currency has lost appeal for investors of portfolio in general affecting this type of investment.Before this persistent deterioration of the exchange rate, is heard much dollar question of whether to lose its status as a reserve currency deposited in several central banks in the world, and in front of the value of an ounce of gold, which it had lost in value by 80% in the 1970s and 65% in the last decade in high grade. It is expected that the value of the dollar in the world continue depreciating, with which the portfolios and private savings will continue losing value worldwide with emission representing to finance a deficit of US $11.9 trillion.
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