Currency Crises: Theoretical and Empirical Overview of the 1990s

This paper provides an overview of currency crises theories, methods for crises prediction, implications of currency crises for economic policy, as well as different currency crises episodes in the 1990s. The theoretical models of currency crises can be divided into three generations of models: first-generation models, first found in the work of P. Krugman in the 1970s, second-generation models, following M. Obstfeld’s papers in the 1980s, and third-generation models developed on the basis of the Asian crisis experience. A crisis can be forestalled if it is detected in its early stage and appropriate measures are undertaken; however, this pose a great challenge that requires better co-operation between private investors and economic policy makers. Since the exchange rate regime is a crucial element in precipitating a crisis, it is important to take into account changes in the regime. The Asian, Russian and Brazilian crises have confirmed once again that the international financial system needs to be adjusted in order to decrease the possibility of a crises and to reduce its extent. The private sector, national governments and international financial institutions, such as the IMF, play the major role in this process.