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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Economic Theories on Currency Crises - Dictionary of Arguments
Feldstein I 426 Currency crises/Economic theories/Krugman: (…) the standard reaction both of most economists and of international officials to currency crises is, at least informally, based on something like the scenario just described. >Currency crises/Obstfeld. That is, they recognize that the speculative attack, driven by expectations of devaluation, was itself the main proximate reason for devaluation; yet they regard the whole process as ultimately caused by the policies of the attacked country, and in particular by a conflict between domestic objectives and the currency peg that made an eventual collapse of that peg inevitable. In effect, the financial markets simply bring home the news, albeit sooner than the country might have wanted to hear it. A significant number of economists studying this issue do, however, believe that the complaints of countries that they are being unfairly or arbitrarily attacked have at least some potential merit. So let me turn to the possible ways that - especially in the context of second-generation models ((s) like the Obstfeld model) - such complaints might in fact be justified. Feldstein I 427 KrugmanVsObstfeld: (…) it is possible to conceive of a number of circumstances under which the financial markets are not as blameless as all that. Self-Fulfilling Crises/Krugman: An individual investor will not pull his money out of the country if he believes that the currency regime is in no imminent danger; but he will do so if a currency collapse seems likely. A crisis, however, will materialize precisely if many individual investors do pull their money out. The result is that either optimism or pessimism will be self-confirming; (…). Feldstein I 428 Herding/Krugman: Both the canonical currency crisis model and the second-generation models presume that foreign exchange markets are efficient-that is, that they make the best use of the available information. >Currency crises/Krugman. There is, however, very little evidence that such markets are in fact efficient; (…). In general, herding can be exemplified by the result found in Shiller’s (1989)(1) remarkable Feldstein I 429 survey of investors during the 1987 stock market crash: the only reason consistently given by those selling stocks for their actions was the fact that prices were going down. In the context of a currency crisis, of course, such behavior could mean that a wave of selling, whatever its initial cause, (…). Feldstein I 430 Contagion/Krugman: One simple explanation of contagion involves real linkages between the countries: a currency crisis in country A worsens the fundamentals of country B. However, even in the European and Asian cases the trade links appear fairly weak; (…). At this point two interesting “rational” explanations for crisis contagion between seemingly unlinked economies have been advanced (Drazen 1997)(2). One is that countries are perceived as a group with some common but imperfectly observed characteristics. To caricature this position, Latin American countries share a common culture and therefore, perhaps, a “Latin temperament”; (…). Feldstein I 431 Market manipulation/Krugman: Scenarios in which crises are generated either by self-fulfilling rational expectations or by irrational herding behavior imply at least the possibility of profitable market manipulation by large speculators. (Krugman 1996)(3) proposed that such hypothetical agents be referred to as “Soroi.” ((s) this is the Greek plural of Soros.)) Suppose that a country is vulnerable to a run on its currency: either investors believe that it will abandon its currency peg if challenged by a speculative attack, or they simply emulate each other and can therefore be stampeded. Then a large investor could engineer profits for himself by first quietly taking a short position in that country’s currency, then deliberately triggering a crisis-which he could do through some combination of public statements and ostentatious selling. Feldstein I 432 In Krugman (1996)(3) I also argued that the existence of Soroi itself tends to advance the date of speculative attack: since everyone knows that a currency that is vulnerable to a self-fulfilling attack presents a profit opportunity for large players, investors will sell the currency in anticipation that one or another of these players will in fact undermine the exchange regime-and in so doing investors will force the collapse of the regime even without the aid of a Soros. >Currency crises/Krugman. 1. Shiller, R. 1989. Market volatility. Cambridge, Mass.: MIT Press. 2. Drazen, A. 1997. Contagious currency crises. Mimeograph. 3. Krugman, P. 1996. Are currency crises self-fulfilling? In NBER Macroeconomics Annual 1996, ed. B. S. Bernanke and J. J. Rotemberg. Cambridge, Mass.: MIT Press. 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. |
Economic Theories Feldstein I Martin Feldstein (ed.) International Capital Flows. Chicago: University of Chicago Press. 1999. Chicago 1999 |
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> Counter arguments in relation to Currency Crises
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