Are Crisis-Induced Devaluations Contractionary? If so, Why?

Shen Chung-Hua

Chapter 4 in Exchange Rates, Currency Crisis and Monetary Cooperation in Asia, 2009, pp 89-109 from Palgrave Macmillan

Abstract: Abstract The Mexican crisis of 1994–1995 followed by the East Asian crisis of 1997–1998 and the other crises in Brazil, Russia and Turkey in 1999–2000 have generated a great deal of academic and policy interest in the causes of currency crises in emerging and developing economies. The main focus of this literature has been on whether the crisis was “inevitable” (first generation models) or “self-fulfilling” (second generation models). A common element in both these two genres of crisis models is that, if a speculative attack is successful in breaking down the currency peg, the resulting devaluation ought to mark the end of the crisis. Real devaluation, according to the conventional view, would have expansionary effects because it increased the demand for tradables (Dornbusch 1988). In practice, the postdevaluation experiences have varied markedly among countries. Some countries, like Brazil, seemed to recover smartly following the initial devaluation of the real. Others underwent a considerable output contraction immediately following flotation of the respective currencies. Kamin and Rogers (2000) and Santaella and Vela (1996) confirm this (contraction) to have been the case for Mexico following the 1994–1995 crisis and Moreno (1999) shows it to have held for East Asia in general.2

Keywords: Exchange Rate; Real Exchange Rate; Capital Flow; Crisis Period; Currency Crisis (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-23419-2_4

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DOI: 10.1057/9780230234192_4

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