It is well known that equity, currency, or banking crises generate substantial real costs for the country in which they occur. Authorities and financial market participants have often been concerned that these crises would spill over or spread, leading to financial system volatility or crises elsewhere in the world. The recent Mexican, Asian, and Russian crises are examples where shocks origina...

This paper investigates currency and financial crises in an optimizing general equilibrium model. It is shown that a rise in current and expected future budget deficits generates a real exchange rate appreciation and a decumulation of external assets, leading up to a currency crisis when foreign reserves approximate a critical level. Strong empirical support for our model is obtained by a probi...

Financial contagion and Sudden Stops of capital inflows experienced in emerging-markets crises may originate in an explosive mix of lack of policy credibility and world capital market imperfections that afflict emerging economies with national currencies. Hence, this paper argues that abandoning national currencies to adopt a hard currency can significantly reduce the emerging countries’ vulner...

A growing empirical literature studies determinants of the probability of a currency crisis, often searching for a combination of indicators to provide an early warning system (EWS). The existing work frequently relies on discrete choice specifications, such as probits, that do not incorporate the time dimension of the occurrence of currency crises and that are not derived from an underlying be...

This paper suggests, first, that a simple theoretical framework is useful in explaining financial crises in emerging economies. Second, it reviews the East Asian financial crises of 1997-98 . Third, the paper examines the origins of Argentina’s crisis of 2001-02. Fourth, it presents a comparative analysis of both crises, highlighting their similarities and differences. Finally, the conclusions ...