1. bookVolume 10 (2021): Issue 3 (September 2021)
Journal Details
First Published
11 Mar 2014
Publication timeframe
3 times per year
access type Open Access

Output Losses from Currency Crises and the Role of Central Bank

Published Online: 06 Sep 2021
Page range: 79 - 97
Received: 28 Apr 2020
Accepted: 06 Jan 2021
Journal Details
First Published
11 Mar 2014
Publication timeframe
3 times per year

Generally, one of the important issues related to currency crises is the output losses caused by these phenomena. In this study, determinants of output losses and particularly the role of the central bank will be evaluated during currency crises. Moreover, the paper tries to investigate the roles of macroeconomic variables and also monetary, fiscal and exchange rate policies on the output losses during currency crises. In this regard, an econometric model with panel data has been used for emerging market countries during 1980-2016. The results show that currency crises accruing have a positive and significant effect on output losses. While the successful defence of central bank has had the negative effects on the output losses, but it is positive for the unsuccessful defence and the non-intervention or immediate depreciation. However, the role of the macroeconomic condition is important where total foreign reserves can be considered as a buffer against the output losses, while inflation and deviation of the real exchange rate from its trend have had positive effects on the output losses. Finally, the output losses can be reduced by an active monetary, fiscal and exchange rate policies.


JEL Classification

1. Bauer, C., Herz, B. 2010, The Dynamics of Financial Crises and the Risk to defend the exchange rate, In Conference Draft November 2009, Annual conference of the Verein für Socialpolitik 2010, Kiel. Search in Google Scholar

2. Berthold, K. and Stadtmann, G. 2018, Who put the Holes in the Swiss Cheese? Currency Crisis Under Appreciation Pressure. Journal of Central Banking Theory and Practice, 7(1), 43-57. Search in Google Scholar

3. Bordo, M., Eichengreen, B. Klingebiel, D., Martinez-Peria, M. and Rose, A. 2001, Is the Crisis Problem Growing More Severe? Economic Policy, 16(32), 53–82. Search in Google Scholar

4. Burnside, C., Eichenbaum, M., Rebelo, S. 2004, Government Guarantees and Self-fulfilling Speculative Attacks, Journal of Economic Theory, 119(1), 31-63. Search in Google Scholar

5. Bussière, M., Fratzscher, M. 2006, Towards a New Early Warning System of Financial Crises, Journal of International Money and Finance, 25 (6), 953-973. Search in Google Scholar

6. Bussière, M., Saxena, S.C., Tovar, C.E. 2010, Chronicle of Currency Collapses: Re-examining the Effects on Output. BIS Working Papers 314. Bank for International Settlements. Search in Google Scholar

7. Calvo, G.A., Reinhart, C.M. 2000, When capital inflows suddenly stop: consequences and policy options. In: Kenen, P.B., Swoboda, A.K. (Eds.), Key Issues in Reform of the International Monetary and Financial System. International Monetary Fund, Washington, D. C., 175-201. Search in Google Scholar

8. Cerra, V., Saxena, S.C. 2008, Growth dynamics: the myth of economic recovery, American Economic Review, 98 (1), 439e457. Search in Google Scholar

9. Chang, R. and Velasco, A. 2001, A Model of Currency Crises in Emerging Markets, Quarterly Journal of Economics, 116(2), 489-517. Search in Google Scholar

10. Corsetti, G., Pesenti, P., Roubini, N., Tille, C., 2000, Competitive Devaluations: Toward a Welfare-Based Approach, Journal of International Economics, 51(1), 217-241. Search in Google Scholar

11. Daniëls, T.R., Jager, H., Klaassen, F., 2011, Currency Crises with the Threat of an Interest Rate Defence, Journal of International Economics, 85(1), 14-24. Search in Google Scholar

12. Dooley, M.P. and Walsh, C. 2000, Capital Control and Crises: Theory and Experience, Presented at AEA Meetings, January 8. Search in Google Scholar

13. Dornbusch, R. 1976, Expectations and Exchange Rate Dynamics, Journal of Political Economy, 84(6), 1161-76. Search in Google Scholar

14. Eichengreen, B., Rose, A.K. 2003, Does it pay to defend against a speculative attack?. In: Managing Currency Crises in Emerging Markets. National Bureau of Economic Research, 61-86. NBER Chapters. Search in Google Scholar

15. Eichengreen, B., Rose, A.K., Wyplosz, C., 1996, Contagious Currency Crises, NBER Working Paper 5681. National Bureau of Economic Research. Search in Google Scholar

16. Eichengreen, B., Rose, A.K., Wyplosz, C., Dumas, B., Weber, A. 1995, Exchange market mayhem: the antecedents and aftermath of speculative attacks, Economic Policy, 10 (21), 249-312. Search in Google Scholar

17. Erler, A., Bauer, C. and Herz, B. 2015, To Intervene, or not to Intervene: Monetary Policy and the Costs of Currency Crises, Journal of International Money and Finance, 51, 432-456. Search in Google Scholar

18. Ezzahid, E. and Maouhoub, B. 2020, Capital Account Liberalization in Morocco: Is it Compatible with Fixed or Flexible Exchange Rate Regime? Journal of Central Banking Theory and Practice, 9(1), 185-218. Search in Google Scholar

19. Flood, R.P., and Garber, P.M. 1984, Collapsing Exchange Rate Regimes: Some Linear Examples, Journal of International Economics, 17, 1-13. Search in Google Scholar

20. Frankel, J.A., Rose, A.K. 1996, Currency crashes in emerging markets: an empirical treatment, Journal of International Economics, 41 (3-4), 351-366. Search in Google Scholar

21. Gerdesmeier, D., Reimers, H.-E., Roffia, B. 2009, Asset Price Misalignments and the Role of Money and Credit, Working Paper 1068. European Central Bank. Search in Google Scholar

22. Gupta, P., Mishra, D. and Sahay, R. 2008, Output Response to Currency Crises, IMF Working Paper. Search in Google Scholar

23. Gupta, P., Mishra, D., Sahay, R. 2007, Behavior of Output during Currency Crises, Journal of International Economics, 72, 428-450. Search in Google Scholar

24. Heinemann, F. 2000, Unique equilibrium in a model of self-fulfilling currency attacks: comment, American Economic Reviews, 90 (1), 316-318. Search in Google Scholar

25. Ilzetzki, E.O., Reinhart, C.M., Rogoff, K.S. 2008, Exchange Rate Arrangements Entering the 21st Century: Which Anchor Will Hold. Data available at http://www.carmenreinhart.com/research/publications-by-topic/exchange-rates-anddollarization(Mimeo). Search in Google Scholar

26. IMF, 2016, Global Financial Stability Report, November 2016 update, International Monetary Fund. Search in Google Scholar

27. Jeanne, O. (2000), Currency Crises: a Perspective on Recent Theoretical Developments, Special Paper International Economics 20, Princeton University Search in Google Scholar

28. Kapp, D. and Vega, M. 2014, Real Output Costs of Financial Crises: A Loss Distribution Approach, Cuadernos de Economía, 37, 13-28. Search in Google Scholar

29. Klaassen, F., Jager, H. 2011, Definition-consistent measurement of exchange market pressure, Journal of International Money and Finance, 30 (1), 74-95. Search in Google Scholar

30. Krugman, P. 1979, A Model of Balance-of-Payments Crisis, Journal of Money, Credit, and Banking, 11(3), 311.325. Search in Google Scholar

31. Krugman, P. 1999, Balance Sheets, The Transfer Problem and Financial Crises, in International Finance and Financial Crises: Essay in Honor of Robert P. Flood Jr., ed. P. Isard, A. Razin and A.K. Rose, pp: 31-44, Boston: Kluwer. Search in Google Scholar

32. Kuncoro, H. 2020, Interest Rate Policy and Exchange Rates Volatility Lessons from Indonesia. Journal of Central Banking Theory and Practice, 9(2), 19-42.  Search in Google Scholar

33. Melvin, M., Taylor, M.P. 2009, The Crisis in the Foreign Exchange Market, Journal of International Money and Finance, 28 (8), 1317-1330. Search in Google Scholar

34. Milesi-Ferretti, G.M., Razin, A. 1998, Current Account Reversals and Currency Crises: Empirical Regularities, NBER Working Paper 6620, National Bureau of Economic Research. Search in Google Scholar

35. Morris, S., Shin, H.S. 1998, Unique Equilibrium in a Model of Self-fulfilling Currency Attacks, American Economic Reviews, 88 (3), 587-597. Search in Google Scholar

36. Obstfeld, M. 1994, The Logic of Currency Crises, Cahiers e´conomiques et mone´taires, 43, 189–214. Search in Google Scholar

37. Reinhart, C., Rogoff, K. 2009, This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press, Princeton, New Jersey. Search in Google Scholar

38. Yazdani, M. 2013, Analyzing Sudden Stops of Capital Inflows and Financial Crises: Evidence from Emerging Markets, Ph.D. Dissertation, University of Isfahan. Search in Google Scholar

39. Yazdani, M., and Tayebi, S.K. 2013, How do Sudden Stops of Capital Flows Affect Currency Crises in Asia, Journal of Money and Economy, 8 (3), 1-20. Search in Google Scholar

40. Yazdani, M., Dargahi H. and Nikzad, M. 2017, Evaluating the Output Losses from Currency Crises and the Role of Central Bank in Emerging Economies, Journal of Economics and Modelling, 8(29), 41-65. Search in Google Scholar

Recommended articles from Trend MD

Plan your remote conference with Sciendo