Currency Crises

This chapter focuses on what is behind a currency crisis, which is when the exchange rate depreciates and the local currency loses values. There are three types of models that explain the reason for a currency crisis: first, second, and third generation. First generation models say that currency crises are the result of macroeconomic policies that are inconsistent with a fixed exchange rate. Second generation models of currency crises are what are called “self-fulfilling crises,” because if everybody believes that the crisis will happen, it will. Third generation models analyze the interaction between a currency crisis and a banking crisis.

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