Currency Crisis in Developing Countries

Currency Crisis in Developing Countries

Christopher Boachie (Central University College, Ghana)
DOI: 10.4018/978-1-4666-9814-7.ch096


Currency crises have been the subject of an extensive economic literature, both theoretically and empirically. The purpose of this chapter is to examine and investigate the causes of currency and associated crises, evaluates the accuracy of empirical models in predicting crises, and review works on measuring the consequences of crises on the real economy. It is a cross sectional survey study and used of secondary data on the causes of currency and associated crises, and challenges in avoiding these crises. The study reveals that reduce output, financial liberalization, capital and current accounts, the real economy and macroeconomic conditions are some of the indicators of currency crisis. A key cost of currency crisis is forgone output. EWS models estimate probabilities of crises to occur. The implications are that currency crisis negatively affects the economy needs to be predicted and managed appropriately.
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1. Background

There is an over-abundance of theoretical models and practical studies which analyse financial crises in general and predicting tools and models of those crises in particular. Studies attempting to identify the causes, origins, and consequences of currency crises (Kaminsky & Reinhart, 1999; Jotzo, 1999; Zhuang, 2002; Bongini, Laeven, & Majnoni, 2002; Sy, 2003; Apoteker & Barthélamy, 2005; Kaminsky, 2006; Bussiere & Fratzscher, 2006; Andreou, 2007; Cipollini & Kapetanios, 2009) mainly focus on macroeconomic factors, vulnerability indicators, probability of crises, and exchange market pressure (EMP) index, that can predict those crises.

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