Turkey has an oldfashioned currency and debt crisis. A seminal paper by krugman 1979 provided a convincing theore. Opinion turmoil for turkeys trump the new york times. A currency crisis occurs when a speculative attack on some currency forces policy officials to abandon.
The original model is due to krugman 1979, who drew on the work of salant and henderson 1978 on the study of attacks on a governmentcontrolled price of gold. Although such crisesthe latin american debt crisis of the 1980s, the speculations on european currencies in the early 1990s, and the. Obstfelds papers in the 1980s, and thirdgeneration models developed on the basis of the asian crisis experience. Currency crisis models currency crises have been the subject of an. Three generations of crises, three generations of crisis. The committee stresses that the award was essentially given to krugman for three of his papers. This currency crisis is real and it will sink a whole lot of eastern europe economies. Whats happening in turkey is a classic currency anddebt crisis, of a kind weve seen many times in asia and latin america. Theoretical and empirical overview of the 1990s summary this paper provides an overview of currency crises theories, methods for crises prediction, implications of currency crises for economic policy, as well as different currency crises episodes in the 1990s. As an introduction, krugman briefly discusses the issues raised at the conference.
Paul robin krugman is an american economist, liberal columnist and author. Paul krugman s currency and crises is a collection of 11 academic essays on international monetary economics written between the late 1970s and 1980s. The socalled firstgeneration research on currency crises presented a. Paul krugman is an economics professor at princeton university and nobel prize winner for economics in 2008. The first generation currency crisis model finance essay. Krugman 1979, 1980, 1991a, see the list of references in our book. Meanwhile matthew yglesias says that what russia is doing is the textbook approach to handling a currency crisis, and speculates about why it isnt working. The first two papers are about international trade, notably intraindustry trade, and are discussed in section 2. The mother of all currency crises paul krugmans blog the new. Currency crisis models craig burnside, martin eichenbaum, and sergio rebelo the new palgrave.
This morning tim duy addresses the woes of the ruble, which is in free fall despite a big rate hike, and declares that it appears really quite textbook. In a country with highly developed financial markets it can use. Alec cairncross and i began that study in 1979, a year better remembered as when paul krugman published his theory of balance payments crises krugman, 1979. It might seem, then, that there is a range of reserve levelswhat cole and kehoe 1996a, b call a crisis. The papers included in this collection reveal the breadth of krugmans work in international monetary economics this is a book that anyone interested in. The return of depression economics and the crisis of 2008.
The upward trend in the shadow price of foreign exchange the price that would prevail after the speculative attackwas supplied by as. Firstgeneration models of currency crises assume that consumers are perfectly informed about macroeconomic fundamentals. Krugman in the 1970s, secondgeneration models, following m. Part of the lecture notes in economics and mathematical systems book series lne. The logic of currency crises university of california, berkeley. Currency crises, nber books, national bureau of economic. The purpose of this paper is to sketch out a framework for understanding the nature of the asian crisis. Hence, reserves can avoid a crisis when the policy inconsistency is transitory. Research stressing the former approach was pioneered by krugman 1979 and flood and garber 1984. Reconciling re models with currency crises krugman, 1979. Paul krugman s most popular book is the return of depression economics and the crisis of 2008. The return of depression economics by krugman, paul and a great selection of related books, art and collectibles available now at.
He is professor of economics and international affairs at the woodrow wilson school of public and international affairs, princeton university, centenary professor at the london school of economics, and an oped columnist for the new york times. There is no universally accepted definition of a currency crisis, but most would agree that they all involve one key element. What differentiates the new currency crisis literature from the classi cal literature exemplified by krugman 1979 and flood and garber 1984. Speculators in this approach were therefore seen as rather blameless. Since the currency crisis was the inevitable result of governmental policies inconsistent with a fixed parity, the foreign exchange traders were simply tearing down structures that would have broken down anyway. Vehicle currencies and the structure of international exchange, nber working papers 0333, national bureau of economic research, inc.
The classic firstgeneration models are those of krugman 1979 and flood and garber 1984. One important difference is a change in the macroeconomic and policy models that are used to describe crisis prone countries. In this paper, we analyze the incidence and underlying causes of banking and currency crises in 90 industrial and developing countries over the 197597 period. The collapse of exchange rate regimes springerlink. The answers to the questions are available in pdf format. In 2008, krugman was awarded the nobel memorial prize in economic sciences for his contributions to new trade theory and new economic geography. I will argue that in order to make sense of what happened to asia, it is necessary to adopt an approach quite different from that of traditional currency crisis. Books by paul krugman author of the return of depression. The return of depression economics and the crisis of 2008 paperback september 8, 2009.
A dictionary of economics, 2nd edition february 2007 there have been many currency crises during the postwar era see kaminsky and reinhart, 1999. The theoretical models of currency crises can be divided into three generations of models. In the first generation of currency crisis models inconsistent policies lead to a continuous loss of reserves and, consequently, to a devaluation crisis when reserves have fallen below some critical value e. A model of balanceofpayments crises paul krugman journal. This new collection revolves around krugman s work on international monetary economics from the late 1970s to the present in an effort to make sense of a turbulent period that involved one surprise after another, most of them unpleasant. I apply this to krugman s 1979 balance of payments crisis model, where he argued that there is a unique date on which a crisis occurs. Since the currency crisis was the inevitable result of governmental policies in consistent with a fixed parity, the foreign exchange traders were simply tearing down. In his pioneering work, krugman 1979 argued that when a continuous deterioration in the economic fundamentals turns out to be inconsistent with the policy of fixing the exchange rate, a currency crisis occurs. It is an informal version of a more technical companion piece, krugman 1998. In 2008, krugman won the nobel memorial prize in economics for his contributions. Motivated by the collapse in the price of gold, an important nominal anchor before the floating of exchange rates in the 1970s these models are from seminal papers by krugman 1979 and flood. Typology of currency crisis models firstgeneration models secondgeneration models thirdgeneration models typology early views.
A government can peg the exchange value of its currency in a variety of ways. The dramatic currency crisis that culminated in the august 1993 widening of exchangerate bands. When im in an expansive mood, i like to say that i invented currency crises not the thing itself, which goes back to the invention of. Paul krugman s first collection of essays, rethinking international trade, mounted a spirited assault on established trade theory and proposed an. Paul krugman 1979 showed that if a pegged exchange rate cohexists with budget. Developed in 1980s, these models echoed the prevalent views about currency crises for more than a decade. The canonical currency crisis model, as laid out initially by krugman 1979 and refined by flood and garber 1984, was designed to mimic the commod ity board story. The models in this literature are often categorized as first, second or thirdgeneration. Currency crises and fixed exchange rates in the 1990s.
Balance sheets, the transfer problem, and financial crises. Crises paul krugman, january 2010 princeton university. Find all the books, read about the author, and more. A model of balanceofpayments crises paul krugman journal of money, credit and banking, vol. Imperfect common knowledge in firstgeneration models of. No, really not the thing itself, of course, but i did publish the first paper in the modern academic literature on the subject, back in 1979. The coincidence of banking and currency crises associated with the asian financial crisis has drawn renewed attention to causal and common factors linking the two phenomena. Paul krugman a model of balanceofpayments crises introduction a government can peg the exchange value of its currency. A currency crisis is an episode in which the exchange rate depreciates substantially during a short period of time. The mother of all currency crises paul krugman blog. Currency regimes, capital flows, and crises paul krugman princeton university paper presented at the 14th jacques polak annual research conference hosted by the international monetary fund washington, dcnovember 78, 20 the views expressed in this paper are those of the authors only, and the presence.