Are countries with unregulated capital flows more vulnerable to currency crises? Efforts to answer this question properly must control for “self selection” bias since countries with liberalized capital accounts may also have more sound economic policies and institutions that make them less likely to experience crises. We employ a matching and propensity score methodology to address this issue i...

The recent episodes of financial turmoil in Mexico, East Asia, Russia, Brazil, and Argentina are often dubbed financial crises. However, the severe downturns in equity markets, abrupt currency devaluations, and massive capital flight that characterize these events can still be deemed compatible with efficient and functioning financial markets. Thus, why is a financial crisis a “crisis?” To answ...

We present a dynamic model of self-fulfilling currency crises with asset market frictions. Agents’ actions are not necessarily strategic complements, but we show the existence of a unique threshold equilibrium. Asset market frictions have important indirect effects. Contrary to a non-friction environment, large currency depreciations may occur and an attack that would quickly force the governme...

We investigate convergence towards Purchasing Power Parity (PPP) within the Euro Zone and between the Euro Zone and its main partners using panel data methods. We find strong rejections of the unit root hypothesis, and therefore evidence of PPP, in the Euro Zone for different numeraire currencies, as well as in the Euro Zone plus the United States with the dollar as the numeraire currency, star...

A critical part of this reassessment involved monetary policy and, its close cousin in an open economy, exchange-rate policy. Before the crisis, a de facto currency peg against the United States dollar formed the centrepiece of the monetary policy regimes of many of the countries in the region. But the crisis convinced almost everyone, if they had not been convinced by earlier crises, that such...