Research on the Mechanism of Emerging Market Currency Crises

Author: Jin Hongfei
Publisher:
Publish Date: 2004-12-01
Features: Currency crises are important and cutting-edge issues in international economics and finance. This book conducts an in-depth theoretical and empirical study on the causes of currency crises, their economic consequences, and contagion effects, developing and expanding certain theoretical results. The book focuses on the mechanisms of capital flows, foreign debt, fiscal deficits, and public debt in causing currency crises, rational government assumptions about currency crises, the relationship between currency crises and economic output, and the contagion of currency crises. When discussing the relationship between capital flows, foreign debt, and currency crises, it is argued that investment opportunities in open small economies are a public resource. A model explains how excessive exploitation by investors of this resource leads to excessive capital inflows and foreign debt accumulation, ultimately triggering currency crises, and a mathematical model explains how government guarantees for investment projects lead to large inflows of short-term foreign debt. The empirical analysis of currency crises in developing countries in the 1990s shows that countries with high proportions of short-term foreign debt are more prone to capital outflows during currency crises. In studying the relationship between fiscal deficits, public debt, and currency crises, a consumer dynamic optimization model is constructed to explain how fiscal deficits lead to currency crises, and it is proven that financing deficits with public debt leads to multiple equilibria and self-fulfilling prophecies of currency crises. Under the assumption of a rational government, the book explains with optimal stopping theory under what conditions the government would abandon a fixed exchange rate, constructs an optimal stopping model for currency crises, and uses this model to explain the contagion of currency crises under the assumption of a rational government. When studying the relationship between currency crises and output, the author unifies three currency crises using a model composed of the money market and the product market, discussing why exchange rate depreciation has different effects on the level of economic output. Finally, in studying the contagion of currency crises, evidence of contagion in the 1997-1998 East Asian currency crisis is found through testing the correlation coefficients of exchange rate change rates. Additionally, the author uses a portfolio model to explain the various factors that cause the contagion of currency crises.