IDEAS home Printed from
   My bibliography  Save this article

Currency Crises: A Challenge to Economic Theory and Economic Policy


  • Franz R. Hahn



From the viewpoint of policy makers, the understanding of the causes and the course of financial crises remains inadequate. The theoretical analysis of currency crises has been hampered by the lack of empirical regularities in those of the past. Nonetheless, attempts are made repeatedly to provide a canonical explanation of international financial crises and to propose economic policies to prevent such crises. This article surveys the recent theoretical, empirical and economic policy literature on financial crises (with emphasis on the Asian crisis). Much of the recent theoretical literature, in particular that dealing with the Asian crisis, refers to the complex relationship between the constitutive imperfections of financial markets resulting from asymmetric information and the worldwide liberalization of the financial and capital markets. It is an outstanding feature of financial markets that they are strongly dominated by expectations. The actual market outcome may correspond to expectations even if these expectations were unjustified ex ante or absurd. Thus, expectations determine whether market outcomes tend toward a "good" or "bad" equilibrium. In principle, changes in international investors" expectations for the worse – whether justified or not – may trigger crises (self-fulfilling crises) and move a country from a "good" (high growth) to a "bad" (low growth) equilibrium. According to the views of leading theoreticians and practitioners, this mechanism was the preeminent element of the Asian crisis. It is a surprising insight that "self-fulfilling crises" may indeed be the result of rational behavior, given the constitutive imperfections of financial and capital markets. In a world of liberalized financial markets, such crises cannot in principle be averted and are very difficult to forecast. A reversal of the liberalization of financial markets or the re-introduction of capital controls would be the wrong response, however. A superior option in economic policy is the establishment of "support" systems to increase the efficiency and stability of international financial markets. Core elements of such systems would be institutions of financial surveillance and monitoring, which among other tasks could fulfill the important function of a "lender of last resort" at the international level, and provide an internationally accepted set of rules for standstill agreements, debt relief for and financial default of countries.

Suggested Citation

  • Franz R. Hahn, 1998. "Currency Crises: A Challenge to Economic Theory and Economic Policy," WIFO Monatsberichte (monthly reports), WIFO, vol. 71(9), pages 583-590, September.
  • Handle: RePEc:wfo:monber:y:1998:i:9:p:583-590

    Download full text from publisher

    File URL:
    File Function: Abstract
    Download Restriction: Payment required

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Diamond, Douglas W, 1997. "Liquidity, Banks, and Markets," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 928-956, October.
    2. Demirguc-Kent, Asli & Detragiache, Enrica, 1998. "Financial liberalization and financial fragility," Policy Research Working Paper Series 1917, The World Bank.
    3. Costas Azariadis & Roger Guesnerie, 1986. "Sunspots and Cycles," Review of Economic Studies, Oxford University Press, vol. 53(5), pages 725-737.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Peter Egger & Jan Stankovsky, 1998. "Far East Markets. Attractive for Austria in Spite of the Crisis," Austrian Economic Quarterly, WIFO, vol. 3(4), pages 191-207, October.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wfo:monber:y:1998:i:9:p:583-590. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ilse Schulz). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.