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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Stephen Salant on Currency Crises - Dictionary of Arguments
Feldstein I 422 Currency crises/Canonical Crises Model/Salant/Krugman: The canonical crisis model derives from work done in the mid-1970s by Stephen Salant, 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. Feldstein I 423 But what will happen, asked Salant, if an official price stabilization board announces its willingness to buy or sell the resource at some fixed price? As long as the price is’ above the level that would prevail in the absence of the board-that is, above the Hotelling path-speculators will sell off their holdings, reasoning that they can no longer expect to realize capital gains. Thus the board will initially find itself acquiring a large stockpile. Eventually, however, the price that would have prevailed without the stabilization scheme-the “shadow price”- will rise above the board’s target. At that point speculators will regard the commodity as a desirable asset and will begin buying it up; if the board continues to try to stabilize the price, it will quickly-instantaneously, in the model-find its stocks exhausted. KrugmanVsSalant: 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. >Currency crises/Krugman. 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. 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. |
Salant I Stephen W. Salant Exhaustible Resources and Industrial Structure: A Nash-Cournot Approach to the World Oil Market Chicago 1976 Feldstein I Martin Feldstein (ed.) International Capital Flows. Chicago: University of Chicago Press. 1999. Chicago 1999 |
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