Currency Crises

by | Jul 17, 2023 | finance

Write a research project discussing a topic on Currency Crises
The paper should follow the basic structure:
I. The paper should start with a short introduction/motivation section. Why should anyone care about your topic? Here talk about specifics, current events, politics, etc. (~1 pg). Be sure to establish a clear thesis (argument/focus) and lay out preliminary support you will reference throughout the next section.
– Use sources from reputable publications here (NY Times, Wall Street Journal, Economist, etc)
II. Next, you are expected to review the major contributions on the topic and the current state of the literature, citing at minimum five sources scholarly sources. This should be the bulk of your paper (~3-4 pgs). It is a literature review of your topic. If you have a specific topic (e.g. a specific trade deal, etc) then be sure to generalize your topic for this section. So if you were discussing NAFTA or Brexit, you would want to discuss recent literature on free trade agreements/areas for the literature review. Here you want to discuss general theories on your topic so that you can establish the necessary economic relationships.
– Use scholarly sources here (Journal Articles, Federal Reserve, IMF or NBER Studies, etc)
III. Extension. You just reviewed the literature on a specific subject. Here you should suggest an extension to the current literature (~.5 pgs). What is missing from the literature you reviewed (could be a new data set, case study, research methodology)?
IV. Conclusion. Wrap it up. Tie together the support presented above to call back to main thesis (~ .5 pg).
V. Reference Section that links to in-text citations. Use any citation format you choose (APA, MLA, etc), just be consistent throughout the paper. If you choose to, you can simply footnote within the text and forego this section.

Sample Solution

A currency crisis is a sudden and sharp decline in the value of a country’s currency.

 

Sample Solution

A currency crisis is a sudden and sharp decline in the value of a country’s currency.

 

Introduction

A currency crisis is a sudden and sharp decline in the value of a country’s currency. This can lead to a number of problems, including inflation, unemployment, and a decline in economic growth. Currency crises can have a significant impact on the global economy, as they can lead to financial instability and a loss of confidence in the international financial system.

There are a number of factors that can contribute to a currency crisis, including:

  • Overvaluation of the currency: If a currency is overvalued, it means that it is priced too high relative to other currencies. This can make it more expensive for businesses to import goods and services, which can lead to inflation.
  • Large current account deficits: A current account deficit occurs when a country imports more goods and services than it exports. This can put pressure on the currency, as it means that the country is selling more of its currency than it is buying back.
  • Speculative attacks: Speculative attacks occur when investors sell a country’s currency in the expectation that it will decline in value. This can lead to a self-fulfilling prophecy, as the selling pressure can cause the currency to actually decline in value.

Literature Review

There is a large body of literature on currency crises. Some of the most influential work in this area has been done by economists such as Rudiger Dornbusch, Jeffrey Sachs, and Guillermo Calvo.

Dornbusch (1976) developed a model of currency crises that is based on the idea of self-fulfilling prophecies. In this model, a speculative attack can occur even if there is no fundamental reason for the currency to decline in value. This is because investors may believe that the currency is going to decline, and this belief can lead to a self-fulfilling prophecy.

Sachs (1985) developed a model of currency crises that is based on the idea of overvaluation. In this model, a currency crisis can occur when a currency is overvalued relative to its fundamentals. This is because the overvaluation can lead to a current account deficit, which can put pressure on the currency.

Calvo (1983) developed a model of currency crises that is based on the idea of time inconsistency. In this model, the government may have an incentive to announce a policy that is not credible. This can lead to a speculative attack, as investors may believe that the government will not be able to follow through on its policy.

Extension

One area where the literature on currency crises could be extended is in the study of the role of financial markets. Financial markets can play a significant role in currency crises, as they can amplify the effects of economic shocks. For example, if there is a sudden sell-off of a country’s currency in the foreign exchange market, this can lead to a sharp decline in the value of the currency.

Another area where the literature on currency crises could be extended is in the study of the role of government policies. Government policies can play a significant role in preventing or mitigating currency crises. For example, a government can try to reduce the likelihood of a currency crisis by maintaining a stable macroeconomic environment.

Conclusion

Currency crises are a serious problem that can have a significant impact on the global economy. There is a large body of literature on currency crises, but there is still much that we do not know about these events. Future research on currency crises should focus on the role of financial markets and the role of government policies.

References

  • Calvo, G. (1983). Staggered prices in a temporally unstable economy. Journal of Monetary Economics, 12(3), 383-398.
  • Dornbusch, R. (1976). Expectations and exchange rate dynamics. Journal of Political Economy, 84(6), 1161-1176.
  • Sachs, J. (1985). The dollar and the policy mix: 1985. Brookings Papers on Economic Activity, 1, 1-65.

 

 

 

 

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