Currency Crises and Collapses

Four points are emphasized: 1. The real exchange rate is a key relative price. 2. The real exchange rate is in many, though not all, instances a policy variable. 3. An overly accommodating capital market aggravates the potential for mismanaging the exchange rate and amplifies the ultimate costs of a...

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Bibliographic Details
Published in:Brookings papers on economic activity 1995-01, Vol.1995 (2), p.219-293
Main Authors: Dornbusch, Rudiger, Goldfajn, Ilan, Valdés, Rodrigo O., Edwards, Sebastian, Bruno, Michael
Format: Article
Language:English
Subjects:
Currencies
Currency
Currency devaluation
Currency revaluation
Depreciation
Economic models
Economic recessions
Economic reform
Exchange rates
Foreign exchange
Foreign exchange controls
Foreign exchange rates
Gross domestic product
Inflation
Inflation rates
Interest rates
Overvalued currency
Real exchange rates
Statistical analysis
Studies
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Summary:Four points are emphasized: 1. The real exchange rate is a key relative price. 2. The real exchange rate is in many, though not all, instances a policy variable. 3. An overly accommodating capital market aggravates the potential for mismanaging the exchange rate and amplifies the ultimate costs of a collapse. 4. Inflation has been overemphasized as a policy target. The inertia of the level and rate of change of prices is emphasized as a key aspect of real exchange rate behavior. Because the real exchange rate is sticky downward, policy makers are ill-advised to let it rise in the firms place. At the outset of any stabilization, the nominal exchange rate should play a key role, more so if any economy is coming out of extreme inflation. The situation in Brazil and Argentina are looked at to consider whether a somewhat overvalued currency can be brought down without crisis and, in particular, whether and how nominal devaluation can be effective. The growth performance of Chile and Mexico are compared. It is concluded that Mexico's neglect of a competitive real exchange rate is an important factor in its relatively poorer performance.
ISSN:0007-2303
1533-4465
0007-2303
DOI:10.2307/2534613