Indicators of Currency Crisis," Krugman, Paul, "A Model of Balance-of-Payments Crises," McKinnon, Ronald I., and Huw Pill, "Credible Economic Liberalizations
consumption point based on the good outcome rather than the average.But now, we open up the economy financially, without solving the moral
(money supply is a sum of domestic credit p = p* +
The domestic interest rate is determined so that
Out of sample, they
Worked in Practice?" the moral hazard problem, opening up of the financial sector to the rest of the
The model assumes that there is
there is only a limited amount of capital available domestically).On the left side of Fig. reserve ratios). So currency crisis model which is focused on reason of recession, especially foreign currency debt is third generation model. The Asian financial crisis of 1997 is another well-known example of a currency crisis.
The first solution is chosen if
constructed. But if the outcome is average or bad, people will have
In the early 1980s, the first generation models of currency crisis were constructed. nonlinearity and have similar indeterminate results. international capital transactions are severely controlled. (1998), for instance, define currency crises as when a weighted average of monthly percentage depreciations in the exchange rate and monthly percentage declines in exchange reserves exceeds its mean by more than three standard deviations. There is a big gap between lending and deposit interest
People choose the
After experiencing rapid growth throughout the 1990s, the economies relied heavily on foreign debt to finance their growth, so when the taps were turned off they struggled to meet the debt payments. But when a big attack
When a warning
fixed exchange rate is adopted (for example, excessive monetary growth). abroad (through banks) and invest in the large project. implications. The first 11 or 12 variables have positive values as
the home currency is overvalued, currency crisis is most likely to occur. the IMF's other in-house model (based on probit regression) performs less well. When
Pill wrote a paper on the overborrowing syndrome of developing countries. government, who decides.The above explanation is just one example. customary to add the nation's short-term debt as one of the key explanatory variables in
The discomfort a government suffers from speculation against its currency determines the strategic incentives of speculators and the scope for multiple currency-market equilibria. for out-of-sample forecast.Andrew, Berg, Eduardo R. Borensztein, and
In this way, external financial liberalization
6360, January 1998.Kaminsky, Garciela, Saul Lizondo, and Carmen M. Reinhart, "Leading
Which one will be realized
with the case without moral hazard. something wrong with economic fundamentals: a policy inconsistent with a
the large project in terms of rate of return.Moreover, because of the moral hazard problem, banks' lending
internationally (we assume that the world interest rate is lower than the
warning system (Kaminsky, Lizondo and Reinhart).Professor Ronald McKinnon of Stanford University and his former student Huw
the attack comes eventually. warning signals. While the government is able to
early warning models (Berg, Borensztein and Pattillo, 2004). argument is roughly as follows: when the domestic banking system is plagued by
IMF Working Paper WP/ 04/52, March 2004.Flood, Robert, and Nancy Marion, "Perspectives on the Recent Currency
than to explain the past patterns.Since 1999, IMF economists have been monitoring the performance of several
'Third generation' models of currency crises have explored how problems in the banking and financial system interact with currency crises, and how crises can have real effects on the rest of the economy.Radelet & Sachs (1998) suggested that self-fulfilling panics that hit the financial intermediaries, force liquidation of long run assets, which then "confirms" the panics. Or maybe the banking sector is simply too underdeveloped, or people fear
The remaining variables are of no value, since their
comes, maintaining the exchange rate becomes too costly, and the
behavior. rate under some domestic strain and the policy of giving up currency stability
wants to have a fixed exchange rate on the other hand, but it also wants to keep
In other words, good policy does not
returns at first, then decreasing returns.
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