This article describes models and empirical evidence on currency crises. The evidence from developed and developing countries indicates that crises are of different varieties. It also shows that crises do not occur in economies with sound fundamentals, with vulnerabilities far more widespread and profound in emerging economies. Vulnerabilities are associated with fiscal problems, loss of competitiveness and a deteriorating current account, external debt unsustainability, or problems in the financial sector – especially banks. Interestingly, those crises associated with bank fragility are the costliest in terms of output losses and loss of access to international capital markets.
KeywordsBudget deficits Currency crises Currency crisis models Deposit insurance European Monetary System Exchange Rate Mechanism Fixed exchange rates Foreign-debt defaults Imperfect information International capital flows International capital markets Moral hazard Regression tree analysis Self-fulfilling currency crises Sovereign defaults Sticky prices Sudden-stop currency crises
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