An Overview of Currency and Banking Crises Models: A Comprehensive Literature Review

K. Baishnobi Patro () and Balaga Mohana Rao ()
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K. Baishnobi Patro: Indian Institute of Technology Dharwad
Balaga Mohana Rao: Indian Institute of Technology Dharwad

A chapter in Financial Markets, Climate Risk and Renewables, 2024, pp 205-220 from Springer

Abstract: Abstract In a world of distinctly integrated and sophisticated financial markets, the threat of currency crises becomes a centre of discussion in macroeconomics. Currency crisis, in crude sense, is the substantial depreciation in the nominal exchange rate. This paper provides a systematic review of some of the important theoretical models of currency crisis. The first-generation currency crises mostly deal with the failure of the government to sustain budget deficit resulting from monetization of fiscal deficit whereas the second-generation currency crises models deal with the crisis resulting from the policy trade-off between fixed/pegged exchange rate and expansionary monetary policy arising from self-fulfilling speculative attack. This paper is concluded by highlighting the recent crises occurring mainly due to failure in the banking system or due to fragile financial system which mainly falls under the third-generation currency crises models. The third-generation model is further extended by analysing the link of banking crises with currency crises.

Keywords: Currency crisis; Self-fulfilling attacks; Banking crisis; Moral hazard; Credit constraints; F31; F38; F40 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:spr:prbchp:978-981-97-6687-1_8

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DOI: 10.1007/978-981-97-6687-1_8

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