History of the Currency Crisis

Paper Summary:

This document discusses currency crises and utilizes the Asian financial crisis of 1997 to 1998 and the Mexican peso crisis of 1994 as illustrative examples. In both of these examples, the writer notes that the currency crises were precipitated by sudden capital flights out of the markets in question which exacerbated the devaluation of the currencies. In essence, the writer maintains that currency crises occur because investors, internal or external, leave a market suddenly and with little prior indication. The writer concludes that regardless of how valid the investor assumption of impending currency devaluation is the fact of their sudden flight from the market always leads to the devaluation they were predicting.

Outline:
Abstract
Currency Crises in Asia and Mexico
Overview
Asian Financial Crisis
South Korean Crisis
Central Bank & OMO
Exchange Rate Behavior
Conclusion
Mexican Currency Crisis
Overview
Build up to Crisis
The Trigger
Conclusion

From the Paper:

"Thus, because of the currency speculators, who are typically foreign institutional investors, introduce a degree of risk simply through the size of their investment in a single currency that would not otherwise be there if the speculation was limited to smaller investors. While there are a whole slew of factors that must accompany a genuine currency crisis, in general, a crisis develops as these large institutional speculators perceive a decline in value of the currency and dump their investments en masse. The ensuing devaluation of the currency in question is unsustainable and the event often exposes other fundamental economic weaknesses that were disguised previous to the onset of the currency crisis, such as credit over extension in the market and a lack of foreign capital reserves."

Sample of Sources Used:

• Brealey, R., et al.(2001). Financial Stability and Central Banks: A Global Perspective. London: Routledge.
• Butler, E. W., Pick, J. B., & Hettrick, W. J. (2001). Mexico and Mexico City in the World Economy. Boulder, CO: Westview Press.
• Chung, Jae-Yong, and Kirkby, R. (2002). The Political Economy of Development and Environment in Korea. London: Routledge.
• Del Negro, M., & Obiols-Homs, F. (2001). Has Monetary Policy Been So Bad That It Is Better to Get Rid of It? the Case of Mexico. Journal of Money, Credit & Banking, 33(2), 404.
• Exchange Rates. (2006). International Monetary Fund (online). Retrieved November 27, 2006 from: http://www.imf.org/ external/data.htm

More papers on History of the Currency Crisis:

• Research Paper # 8642 : "Asian Financial Crisis"
• Analytical Essay # 103228 : "Globalization and the South Korea Crisis, 1997-1998"
• Research Paper # 30134 : "Economic Crisis in Argentina"

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