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This chapter presents a highly stylized model, based on limited access to credit that can explain why an economy that is carrying a large amount of foreign currency debt might be vulnerable to currency crises, leaving it with a depreciated currency and GDP that remains lower than the pre-crisis trend for some time into the future. It is argued that in a monetary economy with standard price rigidities, credit constraints together with pecuniary externalities working through the nominal exchange rate are sufficient to generate currency crises.

The Asian financial crises were unexpected by the market and many countries in the region experienced it at about the same time. Drawing upon the theoretical analyses in chapters 2-4, an operational theory is provided to answer the following questions for the Asian countries: Was a currency crisis produced by an overvalued real exchange rate? Was a debt crisis produced by an “excessive/unsustainable” external debt? What was the interaction between the two? The models imply a set of objective, theoretically-based warning signals and empirical analysis allows the assessment of which countries were or were not highly vulnerable to shocks.

This overview chapter explains the relevance and the contributions of this book to economic theory and policy. The economic theory and mathematics developed in chapters 2 and 3 derive benchmarks for the optimal debt in an environment where both the return on capital and the real rate of interest are stochastic variables. The equilibrium real exchange rate, the subject of chapter 4, is where the real exchange rate is heading. These benchmarks are applied in chapters 5-9 to the euro, the real exchange rate of the transition economies in Eastern Europe, default risks in emerging market countries, the Asian crises, and the United States current account deficits.

The Argentine crisis has been variously blamed on fiscal imbalances, real overvaluation, and self-fulfilling investor pessimism triggering a capital flow reversal. This chapter provides a full assessment of the role of these and other ingredients in the collapse. It shows that in the final years of its Convertibility program, Argentina was not hit harder than other emerging markets in Latin America by global terms-of-trade shocks and financial disturbances. Hence the crisis reflects primarily the high vulnerability to disturbances built into Argentina’s policy framework. These fragilities reinforced each other in such a way that taken jointly they led to a much larger vulnerability to adverse external shocks than in any other country in the region.

This chapter reviews Korea's experience with economic liberalization since the early 1980s. Section 1 provides a brief history of the economic liberalization policy in the broader context of the rise and fall of the Korean model of development. Section 2 analyzes the major economic consequences of the liberalization policy, including its impact on growth and distribution, the currency crisis, and the financial crisis. Section 3 examines the macroeconomic adjustments since the crisis, including the impact on the labor market and income distribution. Section 4 reviews the economic and social policy reforms that the government has pursued since the crisis. The concluding section draws some lessons on liberalization policy from the Korean experience.

While the Thai baht had lost about 55% of its value in terms of the US dollar by the end of January 1998 because it sold the majority of its international reserves in 1997, other currencies across Southeast Asia also experienced such declines since non-resident portfolios retreated from investment in economies that exuded similar characteristics with that of Thailand. The crisis experienced by both the Thai baht and the Indonesian rupiah are the most recent in the series of crises that have occurred recently throughout the developing region that are allegedly caused by a faulty domestic banking system and swelling capital inflows. This chapter emphasizes how the understanding of such crises should be given much attention because of the social costs involved. The chapter examines the various economic implications of these crises in developing countries particularly of those in Southeast Asia.

The negative effects on exports and FDI flows of an exchange rate misalignment are amplified when the misalignment is among countries that share a regional integration agreement. Such agreements strengthen the well-established relationship between real appreciation and currency crises. We conclude that coordination to achieve real-exchange-rate consistency within blocs is key to macro stability and, a fortiori, sustainable trade agreements.

The descent into the depression left bankers, politicians, industrialists, and farmers seemingly helpless in the face of the successive currency and banking crises, growing stocks of unsold food, falling prices, and ever-lengthening queues of men and women waiting desperately for work or for relief payments. This chapter traces the movement into the crisis as it developed and spread as the gold standard broke down, describing the course of the Great Depression in the main areas of the world. A fundamental shift in policy, the abandonment of the gold standard, was needed to arrest this economic contraction. The chapter also considers whether a change of policy in Germany could have forestalled the Nazi regime which imposed horrible costs on Germany and the world.

The 1997/8 Asian crisis was severe for most of the region and the financial crisis had a deep impact on many real economies. This chapter shows that explanations for the crisis are many and varied, as are explanations for the ‘miracle years’; but there are some conclusions that can be safely made. First, the volume of funds involved in the currency and stock market crashes was large with respect to the size of the economies the funds were invested in. There were also large differences in economic performance in the region and while this did not affect the degree to which currency and stock speculation occurred, it did have an effect on the depth of the crisis and the speed of recovery. Thailand, Indonesia, and Korea were worst affected while the People's Republic of China and Taiwan were least badly hit. Finally, the international response to currency crises needs to be more sensitive to the nature and causes of economic problems and their social consequences. The measures described in the ‘letters of intent’ were not the best policies for the affected countries. In particular, they failed to deal with the question of inadequate domestic demand and included policies that made matters worse.

The Asian crisis occurred due to massive foreign investments in East Asia which created strong inflationary pressures, overvalued currencies, and growing current account deficits. An examination of the post-crisis period questions whether the rapid recovery can be attributed to the IMF structural reform programs.

To understand the origins of currency crises is best to think about the basic tri-lemma in international finance. In international finance, the tri-lemma stems from the fact that economic policy makers would like to achieve the openness to international capital flows; use monetary policy as a tool to help stabilize inflation, output, and the financial sector in the economy; and have stable exchange rates. The chapter reviews the analytics of first-generation, second generation and third generation of currency crises model and focus on the fragility of a single currency area.

This chapter argues that the Republic of Korea is not immune to global crises, but that a more than proportional response of gross domestic product to global crises does not seem to be the general case either. It also emphasizes the differences between the current recession and the currency crisis period. The chapter discusses the prospects for the Korean economy, including the issue regarding exports vs. domestic demand and domestic savings rate. The analyses form the basis for discussing appropriate policies for Korea in the aftermath of the global financial crisis.

Following several years of very strong economic growth, Southeast Asia's long boom came to an abrupt end. The first alarm sounded when Thailand's currency was devalued in July of 1997. As the financial crisis spread through the region, Indonesia was hit hardest of all. The collapse of the Indonesian rupiah brought down all twenty-seven of the electric power agreements that had so recently been concluded. Their debt-like characteristics made absolutely sure of this.