Economics Dictionary of ArgumentsHome
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| Currency crises: Currency crises occur when a country’s currency loses significant value relative to foreign currencies, leading to economic instability. Causes include high inflation, large public debt, speculative attacks, and weak financial systems. Crises can trigger capital flight, reduce investor confidence, and strain government finances. See also Currency Policy._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Paul Krugman on Currency Crises - Dictionary of Arguments
Feldstein I 421 Currency crises/Krugman: [a] sort of circular logic - in which investors flee a currency because they expect it to be devalued, and much (though usually not all) of the pressure on the currency comes precisely because of this investor lack of confidence - is the defining feature of a currency crisis. Feldstein I 422 Canonical crises model/Salant/Krugman: The canonical crisis model derives from work done in the mid-1970s by Stephen Salant(1), at that time at the Federal Reserve’s International Finance Section. His starting point was the proposition that speculators will hold an exhaustible resource if and only if they expect its price to rise rapidly enough to offer them a rate of return equivalent (after adjusting for risk) to that on other assets. This proposition is the basis of the famous Hotelling model of exhaustible resource pricing: the price of such a resource should rise over time at the rate of interest, with the level of the price path determined by the requirement that the resource just be exhausted by the time the price has risen to the “choke point” at which there is no more demand. >Hotelling Rule, >Exhaustible resources, >Currency crises/Salant. Feldstein I 423 Salant/Krugman: The canonical currency crisis model, as laid out initially by Krugman (1979)(2) and refined by Flood and Garber (1984),(3) was designed to mimic the commodity board story. Canonical crises model/Salant/Krugman: The canonical currency crisis model, then, explains such crises as the result of a fundamental inconsistency between domestic policies - typically the per- Feldstein I 424 sistence of money-financed budget deficits - and the attempt to maintain a fixed exchange rate. This model has some important virtues. First of all, many currency crises clearly do reflect a basic inconsistency between domestic and exchange rate policy; (…). Second, the model demonstrates clearly that the abrupt, billions-lost-in-days character of runs on a currency need not reflect either investor irrationality or the schemes of market manipulators. It can be simply the result of the logic of the situation, in which holding a currency will become unattractive once its price is no longer stabilized, and the end of the price stabilization is itself triggered by the speculative flight of capital. These insights are important, especially as a corrective to the tendency of observers unfamiliar with the logic of currency crises to view them as somehow outside the normal universe of economic events-whether as a revelation that markets have been taken over by chaos theory, that “virtual money” has now overpowered the real economy (Drucker 1997)(4), or as prima facie evidence of malevolent market manipulation. VsCanonical model/Krugman: Perhaps the best way to describe what is wrong with the canonical crisis model is to say that it represents government policy (though not the market response) in a very mechanical way. The government is assumed to blindly keep on printing money to cover a budget deficit, regardless of the external situation; the central bank is assumed to doggedly sell foreign exchange to peg the exchange rate until the last dollar of reserves is gone. In reality the range of possible policies is much wider. For more sophisticated models see >Currency crises/Obstfeld, >Currency crises/economic theories. Feldstein I 439 Preventions: [One] answer is simply not to offer speculators an easy target, by refusing to defend any particular exchange rate in the first place. Once a country Feldstein I 440 has a floating exchange rate, any speculative concerns about its future policies will already be reflected in the exchange rate. Thus anyone betting against the currency will face a real risk, rather than the one-way option in speculating against a fixed rate. Reasoning along these lines has convinced a number of economists working on currency crises that the ultimate lesson of the crisis-ridden 1990s is that countries should avoid halfway houses. They should either float their currencies or join currency unions. 1. Salant, Stephen. "Exhaustible Resources and Industrial Structure: A Nash-Cournot Approach to the World Oil Market," Journal of Political Economy, October 1976. 2. Krugman, P. 1979. A model of balance of payments crises. Journal of Money, Credit and Banking 11:311-25. 3. Flood, R., and P. Garber. 1984. Collapsing exchange rate regimes: Some linear examples. Journal of International Economics 17: 1-13. 4. Drucker, P. 1997. The global economy and the nation-state. Foreign Affairs 76 (5): 159-71. Paul R. Krugman. „Currency Crises“. In: Martin Feldstein (ed). International Capital Flows. Chicago: University of Chicago Press. 1999._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
EconKrug I Paul Krugman Volkswirtschaftslehre Stuttgart 2017 EconKrug II Paul Krugman Robin Wells Microeconomics New York 2014 Krugman III Paul Krugman Alasdair Smith Empirical Studies of Strategic Trade Policy Chicago: The University of Chicago Press 1994 Feldstein I Martin Feldstein (ed.) International Capital Flows. Chicago: University of Chicago Press. 1999. Chicago 1999 |
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> Counter arguments against Krugman
> Counter arguments in relation to Currency Crises
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