FINANCIAL FRAGILITY AND CURRENCY CRISES

Michael Bleaney

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Economic Theory and Policy

Abstract

The standard model of currency crises is amended to distinguish between unemployment aversion and financial fragility. Fragility is assumed to affect the authorities ’ sensitivity to a combination of high real interest rates and unemployment. An increase in fragility expands the region of potentially self-fulfilling crises at the expense of the “safe ” region, particularly if the fundamentals are weak. Although exposure to foreign exchange losses and dependence on the exchange rate as a nominal anchor both raise the cost of (and resistance to) devaluation, this has relatively little effect in the presence of financial fragility and poor fundamentals. JEL Nos: F31

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References

1979A Model of Balance-of-Payments Crises 1981A Positive Theory of Monetary Policy in a Natural-Rate Model 1987Macroeconomic Policy in a Two-Party System as a Repeated Game 1984Collapsing exchange-rate regimes 1992Political Cycles in OECD Economies 1996Mexico's balance-of-payments crisis: a chronicle of a death foretold 1995Currency Crises and Collapses 1993The Unstable EMS

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