Perspectives on the Recent Currency Crisis Literature
NBER Working Paper No. 6380
In the 1990s, currency crises in Europe, Mexico and Southeast Asia have drawn worldwide attention to speculative attacks on government-controlled exchange rates. To improve our understanding of these events, researchers have undertaken new theoretical and empirical work. In this paper, we provide some perspective on this work and relate it to earlier research in the area. Then we derive the optimal commitment to a fixed exchange rate and propose a common framework for analyzing currency crises that draws from both the early first-generation work and the more recent second-generation approach. The cross-generational framework stresses the important role of speculators and also recognizes that the government's commitment to a fixed exchange rate is constrained by other policy goals. In the final section we study the crisis prediction literature and find that some crises may be particularly difficult to predict using currently popular methods.
Published: International Journal of Finance & Economics, Vol. 4, no. 1 (January 1999): 1-26