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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Maurice Obstfeld on Currency Crises - Dictionary of Arguments
Feldstein I 424 Currency crises/Obstfeld/Krugman: So-called second-generation models, perhaps best represented by Obstfeld (1994)(1), require three ingredients. First, there must be a reason why the government would like to abandon its fixed exchange rate. Second, there must be a Feldstein I 425 reason why the government would like to defend the exchange rate-so that there is a tension between these motives. Finally, in order to create the circular logic that drives a crisis, the cost of defending a fixed rate must itself increase when people expect (or at least suspect) that the rate might be abandoned. In order for a government to have a real incentive to change the exchange rate, something must be awkwardly fixed in domestic currency. One obvious possibility is a large debt burden denominated in domestic currency-a burden that a government might be tempted to inflate away but cannot as long as it is committed to a fixed exchange rate. Given a motive to depreciate, why would a government choose instead to defend a fixed rate? One answer might be that it believes that a fixed rate is important in facilitating international trade and investment. Finally, why would public lack of confidence in the maintenance of a fixed rate itself have the effect of making that rate more difficult to defend? Here there is a somewhat subtle distinction between two variants of the story. Some modelers - notably Obstfeld (1994)(1) - emphasize that a fixed rate will be costly to defend if people expected in the past that it would be depreciated now. Krugman: The alternative (which to my mind seems much closer to what happens in real crises) is to suppose that a fixed rate is costly to defend if people now expect that it will be depreciated in the future. >Currency crises/Economic theories, >Currency crises/Krugman. 1. Obstfeld, M. 1994. The logic of currency crises. Cahiers Economiques et Monetaires 43: 189-213 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. |
Obstfeld I Maurice M. Obstfeld The logic of currency crises 1994 Feldstein I Martin Feldstein (ed.) International Capital Flows. Chicago: University of Chicago Press. 1999. Chicago 1999 |
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