A number of currency crises have affected certain countries, which have also resulted in contagion in the sense that the crises affected neighboring countries. In a critical essay, select a country (or countries) affected by a specific currency crisis. Analyze the source of the crisis, and the specific resolution of the issue. Indicate whether the International Monetary Fund (IMF) or another sovereign state or country provided intervention. Has the country’s economy recovered since the conclusion of the crisis? Support your findings with additional academic references.Directions:Your essay should be at minimum eight-pages in length, not including the title and reference pages.You must include at minimum three credible sources. Your paper must follow academic writing standards and APA style guidelines, as appropriate.Plagiarism FreeLecture is attached for referencesEnsure that you complete the Check Your Understanding exercises, which will assist you in determining
your command of the topics covered in each module.
Dont be afraid to ask questions; there are no silly questions regarding this course.
Review key points of this week’s readings in the PowerPoint slides linked under Recommended
Readings, Chapter 14 & 15 PowerPoint slides, International Economics.
Learning Outcomes
1. Describe various exchange rate systems that have been used historically and are used currently.
2. Define currency crisis and describe the economic mechanisms that bring currency crisis about.
1. Exchange Rate Systems
Chapter 15 of your textbook describes exchange rate systems in use currently and historically by
individual nations and by the international community of nations. Each of these systems conforms to
one of two ideal types: fixed rate systems, within which exchange rates are fixed or pegged to some
external standard of value (which may be gold, another currency, or a basket of other currencies) and
floating rate systems, which are determined and move in accordance with market forces.
Keep in mind that for any time and place, most exchange rates are not determined fully by one model or
the other. A nation may, for example, decide to fix its currency to the value of another currency, which
in turn may float. Similarly, a group of nations may decide to fix their currencies with respect to each
other while the group of currencies as a whole floats. Moreover, in fixed rate systems governments
occasionally have to appreciate or depreciate the currency to achieve an exchange rate that is
sustainable, and in a floating rate system, governments occasionally intervene to appreciate or
depreciate the currency.
Carbaughs discussion of floating exchange rate systems is anchored in the impossible trinity—the
principle that a country can have any two, but not all three, of the following policies.
With capital free to flow into and out of a country, the country cannot have both independent monetary
policy (ability to have central bank change money supply to exert some control on unemployment and
inflation) and ability to fix exchange rates. This is because, as you have learned, changes in money
supply change the supply and demand for currency and, accordingly, the market for exchange and the
exchange rate.
Even in todays free market world, few if any countries allow their currencies to float freely in accord
with market forces, unconstrained by government control. In the 1970s the worlds largest and most
advanced capitalist nations abandoned the Bretton Woods system of fixed exchange rates (or more
accurately, adjustable pegged exchange rates) that had been set up at the end of World War II. These
countries moved to a managed float system within which currencies are allowed to fluctuate on a dayto-day basis while central banks and treasuries are allowed to influence exchange rates within
guidelines established by the International Monetary Fund
(http://www.imf.org/external/index.htm) (IMF). Accordingly, central banks can buy and sell
currencies to exert some control over countries balance of payments and competitiveness in export
markets. The managed float operates within broad guidelines established by the IMF.
(Source: http://www.imf.org/)
Many smaller countries fix or anchor their currency to the currency of a larger trading partner, called a
key currency. This is necessary to facilitate international settlement for purchase of foreign goods, most
importantly capital goods essential to the productive economy.
2. Currency Crisis
The currency crises that struck Mexico in 1994 and East Asia in 1997 demonstrate that a major problem
with the current system of floating exchange rates is that market instability can lead to dramatic
changes—and in particular falls—in the exchange rate of a country or the rates of a group of countries.
Currency crisis, in turn, may lead to general economic instability and deep economic recession.
A currency crisis is a rapid sell-off by holders of a countrys currency, leading to a rapid or
precipitous drop in the value of the countrys currency. A currency crisis is often associated with, or led
by, the activities of currency speculators and so is sometimes called a speculative attack on a nations
Relatively small and open economies are particularly vulnerable to currency crisis because, as a result of
large inflows of foreign investment, large portions of the currency may be held by foreign investors and
For a short video on the current Greek currency crisis, view the following video.
The Greek Debt Crisis Explained in Four Minutes
(Source: https://www.youtube.com/watch?v=7vpKGv5Afnc)
Yanis Varoufakis explains why talks aimed at renegotiating Greeces debt broke down without an
Carbaugh argues that currency crises are not simply caused by big currency speculators who arise out
of nowhere. There must be an underlying reason for a currency crisis to come about. (2015, p. 468)
Carbaugh lists several causes of currency crises, shown here:
Budget Deficits
Weak Economy
External Influences
Exchange Rates
budget deficits fueled by inflation
In other words, the speculative activity that causes currency crisis is economically rational, or at least
embodies a rational component.
However, some economists have theorized that currency crises may embody irrational components that
make crises self-fulfilling prophecies (Obstfeld, 1986, Radelet & Sachs, 1998).
As the East Asian crisis of 1997 illustrates, an initially solvent economy can succumb to currency crisis,
which can, in turn, spread to other economies.
Check Your Understanding
Click Here to Begin
Carbaugh, R. J. (2015). International economics (15th ed.). Mason, OH: South-Western Cengage
Obstfeld (1986). Rational and self-fulfilling balance-of-payments crises. American Economic
Review 76(1), 72-81.
Radelet, S., & Sachs, J. (1998). The East Asian financial crisis: Diagnosis, remedies, prospects.
Brookings Papers on Economic Activity, 1, 1-74.

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