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Currency Crises and the Term Structure of Interest Rates

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  • Alan Sutherland

Abstract

The currency crisis literature has identified two possible types of crisis: fundamentals based crises and self-fulfilling crises. A fundamentals based crisis arises when some state variable, such as foreign exchange reserves, reaches a critical level and triggers the abandonment of the fixed rate. A self-fulfilling crisis is triggered by an autonomous change in the beliefs of speculators. This paper demonstrates how these two types of crises generate different behaviour in the term structure in the period before the crisis. Copyright Springer Science + Business Media, Inc. 2006

Suggested Citation

  • Alan Sutherland, 2006. "Currency Crises and the Term Structure of Interest Rates," Open Economies Review, Springer, vol. 17(1), pages 57-71, January.
    • Handle: RePEc:kap:openec:v:17:y:2006:i:1:p:57-71
    DOI: 10.1007/s11079-006-5214-1
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    References listed on IDEAS

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    1. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
    2. Flood, Robert & Marion, Nancy, 1999. "Perspectives on the Recent Currency Crisis Literature," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-26, January.
    3. Svensson, Lars E. O., 1991. "The term structure of interest rate differentials in a target zone : Theory and Swedish data," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 87-116, August.
    4. Ozkan, F. Gulcin & Sutherland, Alan, 1998. "A currency crisis model with an optimising policymaker," Journal of International Economics, Elsevier, vol. 44(2), pages 339-364, April.
    5. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "Paper tigers?: A model of the Asian crisis," European Economic Review, Elsevier, vol. 43(7), pages 1211-1236, June.
    6. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 495-514.
    7. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
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    Cited by:

    1. Rodríguez Nava Abigail & Francisco Venegas Martínez, 2010. "Efectos del tipo de cambio sobre el déficit público: modelos de simulación Monte Carlo," Contaduría y Administración, Accounting and Management, vol. 55(3), pages 11-40, septiembr.

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    Keywords

    currency crises; term structure;

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