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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Stanley Fischer on Currency Crises - Dictionary of Arguments
Feldstein I 453 Currency crises/Stanley Fischer: The natural tendency to focus on crises that have happened may lead to certain biases. Almost by definition, these are outliers, outcomes that are worse Feldstein I 454 than anticipated. We should also think for a minute about crises that don’t happen. First, crises don’t happen in most countries, most of the time. Second, in some cases, they don’t happen because countries have taken action to avoid crises that were coming. Third, there are crises that are expected but don’t happen. In thinking about crises, we will need to figure out how and why the markets keep financing these countries, possibly long enough for them to avoid a crisis. >Exchange rates/Fischer, >Exchange rates, >Fixed exchange rates, >Floating exchange rates. Feldstein I 456 IMF/Fischer: Let me also discuss the proposal to amend the Articles of Agreement of the IMF to make liberalization of capital flows a purpose of the IMF. At present we have as one of our purposes the promotion of current account convertibility, but not capital account convertibility-though we are allowed to require countries to impose capital controls in certain circumstances. The proposal to amend the articles in this direction has aroused a great deal of concern in many developing countries, though not, I believe, warranted concern. Capital account liberalization is something that in the long run is going to happen to almost every country, as current account liberalization has happened to almost every country. And in the long run, as financial structures strengthen, it will be a good thing. Quotas/capital account/Fischer: We know that quotas are by and large worse than tariffs, despite the reverse occasionally being true in very specific circumstances. We know something about liberalizing by cutting tariffs proportionally, and so forth. We don’t have similar answers on the capital account-and we should try to develop them. ((s) Written in 1999). Feldstein I 457 Equilibrium/Fischer: (…) I have great difficulty knowing how we know whether the market is doing right, whether there isn’t another equilibrium, and what exactly is driving these situations. But if that’s what you start believing, then you have to ask whether in a crisis or otherwise, countries shouldn’t at least tentatively take a view on where the exchange rate should be. Of course, they can’t in these circumstances use reserves extensively to defend a particular rate, but they may try to use the interest rate to keep the rate from moving too far. Contagion: Contagion exists if, given the objective circumstances, a country is more likely to have a crisis if some other country is also having a crisis. The data show, for instance in a paper by Eichengreen, Rose, and Wyplosz (1996)(1), that contagion exists, a result that is easy to believe given the European crisis, the Latin American crisis, and the Southeast Asian crisis. Question: (…) should the IMF be lending in these circumstances and does that create too much moral hazard? Moral hazard/Fischer: Article I of the IMF’s Articles of Agreement, which sets out the purposes of the Fund, includes the following: “To give confidence to members by making the general resources of the Fund temporarily available to them under appropriate safeguards, thus providing them with opportunity to correct maladjust Feldstein I 458 ments in their balance of payments without resorting to measures destructive of national or international prosperity.” We were set up in part to lend to countries in crisis and are thus not going to tell a member that we cannot lend to it because of the moral hazard. There is moral hazard in every single insurance arrangement. We all know the analysis that seatbelts increase the speed at which people drive, and increase the intensity of accidents, and could even increase the number of accidents. That is also the case with the moral hazard of lending by the official sector in circumstances in which a country is in severe trouble, and there seems to be nothing else that will help it avoid taking measures destructive of national prosperity, which means having a very, very deep recession. 1. Eichengreen, Bany, Andrew Rose, and Charles Wyplosz. 1996. Contagious currency crises. NBER Working Paper no. 5681. Cambridge, Mass.: National Bureau of Economic Research. Stanley Fisher. „Crises that don’t happen.“ 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. |
Fischer St I Stanley Fischer Imf Essays From a Time of Crisis Boston: MIT 2005 Feldstein I Martin Feldstein (ed.) International Capital Flows. Chicago: University of Chicago Press. 1999. Chicago 1999 |
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> Counter arguments against Fischer
> Counter arguments in relation to Currency Crises
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