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On the Changing Nature of Currency Crises

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  • Korkut Erturk

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Abstract

In the crises of 1980s, ever-increasing current account deficits, fueled by unsustainable economic expansions, were invariably the main cause of rising devaluation risk that eventually led to the reversal of capital flows. By contrast, in the 1990s, considerations of financial fragility and sovereign risk have instead become the main determinants of capital flow reversals. The paper argues that portfolio dynamics driven by speculative expectations have been the decisive force in causing financial fragility. Thus rather than seeing the build up of financial risks as the cause of sudden shifts in market sentiment, it might be more meaningful to think of both as being caused by speculative dynamics. It is argued that capital inflows financing speculative asset positions are liable to give rise to endogenous capital flow reversals. Capital inflow continues as long as asset prices are expected to rise. However, this can only be temporary since asset prices cannot keep increasing indefinitely and an abrupt reversal of capital flows ensues once it is taught that asset prices have peaked.

Suggested Citation

  • Korkut Erturk, 2003. "On the Changing Nature of Currency Crises," Working Paper Series, Department of Economics, University of Utah 2003_02, University of Utah, Department of Economics.
  • Handle: RePEc:uta:papers:2003_02
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    File URL: http://economics.utah.edu/research/publications/2003_02.pdf
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    References listed on IDEAS

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    Cited by:

    1. Nazim Kadri Ekinci & Korkut Alp Erturk, 2007. "Turkish Currency Crisis of 2000-2001, Revisited," International Review of Applied Economics, Taylor & Francis Journals, vol. 21(1), pages 29-41.

    More about this item

    Keywords

    Currency crises; portfolio investment; asset prices; capital flow reversal;

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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