Varieties of Currency Crises, Issue 10193
The plethora of currency crises around the world has fueled many theories on the causes of speculative attacks. The first-generation models focus on fiscal problems. The second-generation models emphasize countercyclical policies and self-fulfilling crises. In the 1990s, models pinpoint to financial excesses. With the crisis of Argentina in 2001, models of sovereign default have become popular again. While the theoretical literature has emphasized variety, the empirical literature has supported the one size fits all' models. This paper contributes to the empirical literature by assessing whether the crises of the last thirty years are of different varieties. Crises are found to be of six varieties. Four of those varieties are associated with domestic economic fragility. But crises can also be provoked by just adverse world market conditions, such as the reversal of international capital flows. The so-called sudden-stop phenomenon identifies the fifth variety of crises. Finally, a small number of crises occur in economies with immaculate fundamentals but this type of crises is not an emerging-market phenomenon.
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aftermath of crises Argentina associated booms and busts Bureau of Economic Calvo capture classified as crises consumer prices countercyclical crises in emerging crises of financial currency crises current account problems depreciation devaluations Domestic Credit/GDP growth domestic currency emerging economies emerging markets empirical episode are classified example exports Fiat Money Financial Eacon financial excesses fiscal deficit fiscal deficit/GDP fiscal problems foreign debt groups hikes in world hyperinflation immaculate fundamentals indicators Kaminsky and Reinhart line 64 M2/Reserves mature economies mature markets models focus models of currency months multiple-regime signals approach NBER noise-to-signal ratio output losses prices IFS line probability of crises real appreciation real exchange rate Real Interest Rate regression tree regression tree analysis relative to trend reserve losses sample self-fulfilling crises short-term debt/reserves Sovereign Debt speculative attacks Table threshold Torsten Persson tow Debt/Exports tow Domestic Credit/GDP Trade triggered type of crises variety of crises world interest rate