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CURRENCY CRISIS- International Finance
Solution
The crisis of Thailand has been highlighted to depict the circular logic of currency devaluation. Logic of circle is when investors exit the currency due to fear of its devaluation. And the currency depreciates because of lack of confidence.
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Canonical Crisis: This particular model is influenced by work done by Stephan Salant. The concern for him was on the shortcomings of policies that were aimed at stabilizing commodity prices. The concern was that the speculators will accumulate stock if they foresee a high rise in prices.
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Sophisticated Model: The focus was on three aspects-why the government wants to discontinue fixed rate, why it wants to protect the rate of exchange & the cost of protection should increase in case there exists a doubt among people about currency.
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Disputed issues: self fulfilling crises: It explains that market forces will eventually play out in accordance with the policies and the fundamentals of the economy. If a crisis exists, there will be an effect on currency.
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Herding: This part emphasizes on the fact contrary to the popular belief, there is a lot of inefficiency in the foreign exchange market.
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Market Manipulation: It is observed that big players play with the currency and have a great impact on the system. It is explained later that policy is the crucial part where macroeconomics is the centre of focus. Extensive control on capital can help tide over such currency crisis.
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It is evident that a lot of things have the potential to get currency under crisis. A fine balance needs to be maintained to ensure that the system doesn’t face hardships. The author is right about the various dimensions that have been touched upon. The circular carnage of crisis is valid till date.
The reading helps in opening up thoughts about the extended links that the financial system has. The vulnerability of currency to a hoard of factors is defined. The one striking thing that should be seen is the impact on the Stock markets and the net effect on import export of the crisis hit nations.
The fact that globalization plays a great role in today’s world economy can’t be denied under any circumstance. Investors pulling out of any currency have the potential to derail an economy because of the trade done on a global level.
The author has done a commendable job in researching so much about the past events that have changed the way financial systems work. The events of history need to be a lesson to build the bridges of future. The fact that the crisis of the past has taught a lot can’t be denied.
The part of markets and the impact on import and export needs to be looked on as well. With many countries being key players in importing and exporting commodities, it now plays a major role in the way foreign currency moves around the globe.
Control over the movement of hot money and also policy formulation holds the key to managing the currency crisis. Keeping speculators in check and also not protecting any particular exchange rate shall also help in avoiding a crisis.
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Case from unofficial page of Paul Krugman (CURRENCY CRISES, 2015)
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