Perspectives on the Recent Currency Crisis Literature, Issues 98-130
International Monetary Fund, Sep 1, 1998 - Business & Economics - 57 pages
In the 1990s, currency crises in Europe, Mexico and Southeast Asia have drawn worldwide attention to speculative attacks on government-controlled exchange rates. To improve our understanding of these events, researchers have undertaken new theoretical and empirical work. In this paper, we provide some perspective on this work and relate it to earlier research in the area. Then we derive the optimal commitment to a fixed exchange rate and propose a common framework for analyzing currency crises that draws from both the early first-generation work and the more recent second-generation approach. The cross-generational framework stresses the important role of speculators and also recognizes that the government's commitment to a fixed exchange rate is constrained by other policy goals. In the final section we study the crisis prediction literature and find that some crises may be particularly difficult to predict using currently popular methods.
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attack equilibrium Balance of Payments Bank Calvo capital gain Collapsing Exchange Rate cost Currency Attacks currency crises currency depreciation devaluation developing countries discretion distribution domestic credit domestic-currency interest rate Elhanan Helpman empirical equation escape clause example Exchange Rate Regimes expected loss expected social loss Federal Reserve Figure fixed exchange rate fixed rate Flood and Garber foreseen fundamentals government's Herd Behavior interest parity International Economics International Monetary Fund international reserves investor Journal of International Krugman linear loss function Macroeconomic Mexico mimeo mixed strategy monetary authority monetary policy Money and Finance money demand money market money supply multiple equilibria NBER Working Paper no-attack Obstfeld model optimal optimal currency area Payments Crises period policymakers post-attack predict crises pressure index price level private sector profit opportunities reserve commitment risk premium rule second-generation models Self-Fulfilling shadow rate solution Speculative Attacks speculative pressure sterilization unemployment uniform shocks variables variance Wijnbergen