Dissertation > Excellent graduate degree dissertation topics show

Currency crisis and its contagious

Author: SongHao
Tutor: ZouHongYuan
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: Currency crisis models Economic fundamentals Currency crisis in Southeast Asia The outbreak of the currency crisis Currency Crisis Contagion Foreign exchange reserves Fixed exchange rate system Market expectations Government factors Theorists
CLC: F822.5
Type: Master's thesis
Year: 2000
Downloads: 303
Quote: 1
Read: Download Dissertation

Abstract

A currency crisis may be said to occur when a speculative attack on the exchange value of a currency results in a devaluation (or sharp devaluation) of the currency, or forces the authorities to defend the currency by expending large volumes of international reserves or by sharply raising interest rates. Currency crises in Europe, Mexico, and Asia have drawn widespread attention to speculative attacks on government-controlled exchange rates. In order to understand the causes of currency crises, research has proceeded on both theoretical and empirical fronts. There are many factors which can induce currency crises. They may be domestic factors or foreign disturbances, including mistaken macroeconomic policies leading to conflicts between internal and external equilibria or a sudden shift of market expectation. Two generations of currency crisis models have been set up as researches went on. At the same time, the scope has been extended to multiple nations, resulting in theory of contagion. The early work, now called first-generation model, was in response to currency crises in developing countries such as Mexico(1973-1982) and Argentina (1978-1981). Typically these crises were preceded by overly expansive domestic policies. First-generation models show how a fixed exchange-rate policy combined with excessive expansionary pre-crisis fundamentals push the economy into crisis, with the private sector trying to profit from dismantling the inconsistent policies. Second-generation models are designed to capture features of the speculative attacks in Europe and in Mexico in the 1990s. According to the models, the fundamentals of an economy can be divided into three parts. Only at the central part can multiple equilibria occur. Multiple <WP=8>equilibria may be occur because of nonlinearities in government behavior. Some models show when policies are consistent with the fixed exchange rate, attack-conditional policy changes can pull the economy into an attack. The others show that a shift in market expectation can alter the government’s trade-off and bring about self-fulfilling crises. All of these models admit that the economy can be at a no-attack equilibrium. In such a situation, anything that serves to coordinate the expectations and actions of speculators can suddenly cause the economy to jump from no-attack equilibrium to attack equilibrium. The first- and second-generation models differ in a variety of ways, but we can reconcile them by adjusting their assumptions. It is difficult for the two generations of currency crisis models to explain and predict all types of crises, for they were developed for particular crises during particular periods. On the other side, these crises models performed much better when applied to developing countries. Currency crisis in Asia has remained one of the dominant topics of the economics pages since 1997. To explain the crisis better, a new theory has been developed by Krugman. In his theory, it is moral hazard in enterprises and financial institutions that push the economy under speculative attacks. Contagion is said to occur when a currency crisis in one country is associated with strong pressures on exchange rates in other countries. The focus on contagion in the context of currency crises was inspired by the collapse of the ERM in 1992 and the turmoil that swept financial markets in the aftermath of the Mexican crisis in 1994. As contagion became more and more prevailing, the focus has shifted from the question whether there was contagion to the mechanism and channels of contagion. There are several radical changes in the international environment that have made contagion more prevailing, including globalization of capital <WP=9>markets, growth in global financial assets, insufficient control of global money supply, markets’ controlling function and misconduct. Sometimes currency crises occur simultaneously in several countries due to a common cause, for instance policies undertaken by industrial countries that have similar effects on emerging ma

Currency crisis and its contagious

Abstract

Related Dissertations