Essays on currency crises in developing countries

Jungryol Kim, Purdue University

Abstract

In three essays, this dissertation examines issues in currency crises in developing countries. Essay One reviews the models on currency crises. A currency crisis is caused either by conditions of economic fundamentals in the economy or by self-fulfilling prophecies. But there is no obvious way to test whether any particular crisis was a necessary event given expectations on fundamentals, or simply a self-fulfilling event triggered by a sunspot. In either case, the fundamentals play a significant role in triggering a currency crisis since these fundamentals not only determine the conditions that allow a crisis to occur and the possibility of a crisis but also affect the private agent's beliefs. To improve the predictability of the models, the range of fundamentals need to be expanded to include factors that have been not considered in the classical models. Essay Two examines the possibility of a bank run and the linkage between a bank run and a currency crisis in an economy where the bank's deposits by foreign investors are the only source of financing the investment. Such deposits are subject to the possibility of early withdrawals. If the central bank does not have enough foreign reserves for capital outflows at a fixed exchange rate in case of a bank run, a currency crisis occurs simultaneously. A banking crisis can be initiated from the expectation of an exchange rate collapse by reducing the expected return on investments in terms of foreign currency. Above all, the problems in the banking sector play significant roles in triggering a currency crisis in an economy whose primary financing source is banks' borrowing and deposits from abroad. Essay Three examines the causes of currency crises in developing countries empirically. The results imply that poor economic fundamentals can contribute to devaluations or currency crises. Moreover, self-fulfilling prophecies are another cause of currency crises. An important finding is that international illiquidity, as measured by the ratio of short-term foreign debt to foreign reserves, played significant a role in currency crises. This supports the prediction that the condition of the banking system is important in developing countries whose main financing source is bank's foreign borrowing.

Degree

Ph.D.

Advisors

Carlson, Purdue University.

Subject Area

Finance

Off-Campus Purdue Users:
To access this dissertation, please log in to our
proxy server
.

Share

COinS