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The economics of currency crises and contagion: an introduction

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  • Paolo Pesenti
  • Cedric Tille

Abstract

Two theories of the causes of currency crises prevail in the economic literature. The first traces currency instability to countries' structural imbalances and weak policies; the second identifies arbitrary shifts in market expectations as the principal source of instability. The authors of this article contend that only a synthesis of these theories can capture the complexity of the 1997-98 Asian currency crisis. In their view, the crisis resulted from the interaction of structural weaknesses and volatile international capital markets. The authors also cite two other factors that contributed to the severity of the Asia crisis: inadequate supervision of the banking and financial sectors and the rapid transmission of the crisis across countries linked by trade and common credit sources.

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Bibliographic Info

Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2000)
Issue (Month): Sep ()
Pages: 3-16

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Handle: RePEc:fip:fednep:y:2000:i:sep:p:3-16:n:v.6no.3

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Related research

Keywords: Financial crises ; Financial crises - Asia ; Asia;

References

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  1. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-93, May.
  2. Arvind Krishnamurthy & Ricardo J. Caballero, 1999. "Emerging Markets Crisis - An Asset Markets Perspective," IMF Working Papers 99/129, International Monetary Fund.
  3. Aaron Tornell, 1999. "Common Fundamentals in the Tequila and Asian Crises," NBER Working Papers 7139, National Bureau of Economic Research, Inc.
  4. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper tigers? A model of the Asian crisis," Research Paper 9822, Federal Reserve Bank of New York.
  5. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel & Tille, Cedric, 2000. "Competitive devaluations: toward a welfare-based approach," Journal of International Economics, Elsevier, vol. 51(1), pages 217-241, June.
  6. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
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  8. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
  9. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
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  13. Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, vol. 41(3-4), pages 235-264, November.
  14. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-48, August.
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  16. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  17. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
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  19. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
  20. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  21. Chinn, Menzie D. & Dooley, Michael P. & Shrestha, Sona, 1999. "Latin America and East Asia in the context of an insurance model of currency crises," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 659-681, August.
  22. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 73-96, Fall.
  23. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  24. Fukuda, Shin-ichi & Hoshi, Takeo & Ito, Takatoshi & Rose, Andrew, 2006. "International Finance," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 455-458, December.
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Citations

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Cited by:
  1. Kristin J. Forbes, 2002. "Are Trade Linkages Important Determinants of Country Vulnerability to Crises?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 77-132 National Bureau of Economic Research, Inc.
  2. Mariano Beltrani & Juan Cuattromo, 2012. "Redefining Monetary Policy Limits: Towards an Expansion of its Role in Economic Development," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(67), pages 121-168, December.
  3. Andre Cartapanis, 2004. "Le declenchement des crises de change : qu'avons-nous appris depuis dix ans ?," Economie Internationale, CEPII research center, issue 97, pages 5-48.
  4. Lopes, José Mário & Nunes, Luis C., 2012. "A Markov regime switching model of crises and contagion: The case of the Iberian countries in the EMS," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1141-1153.
  5. Biswa N. Bhattacharyay, 2009. "Towards a Macroprudential Surveillance and Remedial Policy Formulation System for Monitoring Financial Crisis," CESifo Working Paper Series 2803, CESifo Group Munich.
  6. Gus, Garita & Chen, Zhou, 2011. "Averting Currency Crises: The Pros and Cons of Financial Openness," MPRA Paper 30218, University Library of Munich, Germany.
  7. Jeon, Yongil & Miller, Stephen M. & Natke, Paul A., 2006. "Do foreign bank operations provide a stabilizing influence in Korea?," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(1), pages 82-109, February.
  8. Tamim Bayoumi & Manmohan S. Kumar & Giorgio Fazio & Ronald MacDonald, 2003. "Fatal Attraction: A New Measure of Contagion," IMF Working Papers 03/80, International Monetary Fund.
  9. Sandra Lizarazo, 2009. "Default Risk and Risk Averse International Investors," Working Papers 0907, Centro de Investigacion Economica, ITAM.
  10. Akyuz, Yilmaz & Boratav, Korkut, 2003. "The Making of the Turkish Financial Crisis," World Development, Elsevier, vol. 31(9), pages 1549-1566, September.
  11. Garita, Gus & Zhou, Chen, 2009. "Can Financial Openness Help Avoid Currency Crises?," MPRA Paper 23166, University Library of Munich, Germany, revised 07 Jun 2010.
  12. Bayoumi, Tamim & Fazio, Giorgio & Kumar, Manmohan & MacDonald, Ronald, 2003. "Fatal Attraction," CEPR Discussion Papers 3870, C.E.P.R. Discussion Papers.
  13. Matthew Higgins & Thomas Klitgaard, 2000. "Asia's trade performance after the currency crisis," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 37-49.
  14. Radovan Vadovic, 2009. "Early, Late, and Multiple Bidding in Internet Auctions," Working Papers 0904, Centro de Investigacion Economica, ITAM.

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