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How Best to Manage New-Style Currency Crises?

In: Exchange Rates, Currency Crisis and Monetary Cooperation in Asia

Author

Listed:
  • Ramkishen S. Rajan

Abstract

The intensity and suddenness of recent currency crises has inspired a “third generation” crisis literature that focuses on: (a) sharp increases in the domestic value of foreign currency debt (so-called “balance sheet effects”) which adversely affect a country’s solvency position and (b) “sudden stops” in capital inflows (including outright reversals) which negatively influence a country’s liquidity position.2 As Dornbusch (2001) notes: A new-style crisis involves doubt about creditworthiness of the balance sheet of a significant part of the economy … and the exchange rate … (W)hen there is a question about one, the implied capital flight makes it immediately a question about both … (The) central part of the new-style crisis is the focus on balance sheets and capital flight … (T)hey involve a far more dramatic impact on economic activity than mere current account disturbances … both in terms of magnitude of the financial shock as well as disorganization effects stemming from illiquidity or bankruptcy.

Suggested Citation

  • Ramkishen S. Rajan, 2009. "How Best to Manage New-Style Currency Crises?," Palgrave Macmillan Books, in: Ramkishen S. Rajan (ed.), Exchange Rates, Currency Crisis and Monetary Cooperation in Asia, chapter 7, pages 151-179, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-23419-2_7
    DOI: 10.1057/9780230234192_7
    as

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