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Since the 1970s, the theory of currency crisis has been one of the focuses in the theoretical circle, and the number of theoretical and empirical literature on currency crisis has increased sharply. Here, this paper makes a brief review of the existing theoretical literature on currency crisis, summarizes the existing theoretical results, and makes a comparison. As this paper summarizes the theoretical development, it does not involve empirical research< The first generation of currency crisis theory is represented by Paul Krugman, Robert P. flood and Peter M. Garber. The model constructed by Krugman in his a model of balance of payments crises published in 1979 is the earliest theoretical model on currency crisis, while flood and Garber published collapsing exchange rate regions, some linear examples in 1984 to expand and simplify Krugman's model. These two documents are representative works of the first generation of currency crisis theory
the first generation of currency crisis theory assumes that the government will issue paper money without restriction regardless of foreign exchange reserves in order to solve the deficit problem, and the central bank will sell foreign exchange without restriction until it is exhausted when it maintains the fixed exchange rate system. The basis of this theory is that when there is a conflict between the internal equilibrium and the external equilibrium of the economy, the specific policies adopted by the government to maintain the internal equilibrium will inevitably lead to the loss of the external equilibrium. The accumulation of this loss will continue to consume the government's foreign exchange. At the critical point, the impact of speculators will lead to a monetary crisis
the theory holds that a country's economic fundamentals determine whether the external value of money is stable or not, and whether and when the currency crisis will break out. When a country's foreign exchange reserves are not enough to support its long-term stability of the fixed exchange rate, the country's reserves can be exhausted. When the government conflicts between the internal equilibrium and the external equilibrium, the inevitable result of the government's intervention in the foreign exchange market in order to maintain the internal equilibrium is the continuous deviation between the shadow exchange rate and the target exchange rate, which provides foreign exchange speculators with the opportunity to make huge profits. The first generation of currency crisis theory holds that the contradiction between internal equilibrium and external equilibrium, that is, the problem faced by a country's fixed exchange rate system stems from the excessive expansion of domestic credit in order to make up for the government's expanding fiscal deficit. The deficit of the public sector continues to be "monetized", and the interest parity condition will ince capital outflow, resulting in the continuous rection of domestic foreign exchange reserves. When the reserves decrease to a certain critical point, investors will launch speculative attacks on the country's currency in order to avoid capital loss (or obtain capital gains). Because a country's foreign exchange reserves are exhaustible, the government's remaining foreign exchange reserves will be fully purchased by speculators in a very short period of time. The government is forced to abandon the fixed exchange rate system, and the currency crisis broke out. In fact, e to the impact of speculators, the time when the government is forced to abandon the fixed exchange rate system will be earlier than the time when the government voluntarily abandons it, so the social cost will be greater
the first generation of currency crisis theory shows that speculative shock and exchange rate collapse are the result of rational choice of micro investors under the contradiction between economic fundamentals and exchange rate system, not the so-called immoral behavior, so this kind of model is also called rational attack model
some policy propositions can be drawn from the model analysis of the theory. For example, by monitoring the operation of a country's macro-economy, we can predict the currency crisis, and on this basis, adjust the economic operation in time to avoid the outbreak of the currency crisis or rece its impact strength. The effective way to avoid currency crisis is to implement appropriate fiscal and monetary policies, keep the economic fundamentals running healthily, so as to maintain people's confidence in the fixed exchange rate system. Otherwise, speculative activities will force the government to give up the fixed exchange rate system and adjust policies, so that the market can "punish" the previous wrong decisions. From this point of view, capital control will distort market signals and should be abandoned
the mainstream representatives of the second-generation currency crisis theory are Maurice Obstfeld, Gerardo Esquivel and Felipe Larrain
the defects of the first generation currency crisis lie in the fact that the theoretical assumption deviates from the reality too much, and there are great deficiencies in the discussion of the internal and external equilibrium of the government and the policy-making. Moreover, the stability of economic fundamentals may not be the sufficient condition to maintain the stability of exchange rate. It is weak to rely on the basic economic variables to predict and explain the crisis. In the middle and late 1980s, economists began to explain the crisis from the perspective of no continuous deterioration of economic fundamentals and explore the possibility of currency crisis, which is the second generation of currency crisis theory. There are two important hypotheses in this generation theory:
1. In this theory, the government is the active actor to maximize its objective function. The abandonment of the exchange rate system is the choice made by the central bank after balancing "maintenance" and "abandonment", not necessarily the result of the depletion of reserves. For some reason, the government needs to defend the fixed exchange rate system, and for some reason, it will abandon the fixed exchange rate system. When the public expects or suspects that the government will abandon the fixed exchange rate system, the cost of defending the fixed exchange rate system will increase greatly
2. Introce game theory. In the dynamic boben process, the return functions of the central bank and the market investors are mutually inclusive. Both sides constantly modify their behavior choices according to the behavior of the other side or the information about the other side, and their own modification will affect the behavior of the other side. Therefore, there may be a circular process in the economy, with "multiple equilibrium". It is characterized by the possibility of self fulfilling crisis, that is, a country's economic fundamentals may be better, but some of the economic variables are not very ideal. Due to various reasons, the public's views, ideas and confidence are biased. The lack of public confidence spreads through the market mechanism, leading to market resonance, and the crisis is automatically realized. Therefore, this kind of theoretical model is also called "self actualized" crisis model. The typical example is Obstfeld. In the paper "models of currency crises with self fulfilling features", a game model is designed, which shows the characteristics of self fulfilling crisis model in a concise and clear form, and shows its "multiple equilibrium" nature
some scholars, led by 0bstfeld, still pay attention to economic fundamentals in the model, and outline the middle zone of basic economic variables in their theoretical discussion. They believe that when the economy does not enter the zone, the economic fundamentals determine the possibility of the outbreak of the crisis. At this time, the crisis is completely impossible or inevitable; When the economy is in this middle zone, the dominant factor becomes the subjective expectation of investors, and whether the crisis breaks out is not explained by the change of economic fundamentals. The theory holds that the main problem lies in the contradiction between internal and external equilibrium. It is possible for the government to maintain the fixed exchange rate system, but the cost may be very high. The greater the deviation between the government's desire and the public's expectation, the higher the cost of maintaining the fixed exchange rate system. Therefore, when the public has the expectation against the government, the behavior of speculators will lead to the loss of public confidence, which will make the government fail to defend the fixed exchange rate system, and the crisis will come ahead of time. According to this theory, speculators' behavior is unfair, especially to the public of the host country
in addition to such mainstream theories, a few scholars believe that the currency crisis may not be affected by economic fundamentals at all, and the macroeconomic problems of the affected countries are the result of speculation rather than the cause of it. Generally speaking, this kind of literature generally explains the crisis from two perspectives, which are commonly known as herd behavior and contagion effect< Herding behavior proposes that the financial market is not completely efficient e to the irrational behavior of market participants under asymmetric information (this is the difference between herding behavior theory and the first generation of currency crisis theory and the second generation of currency crisis mainstream theory, Both the first generation of currency crisis theory and the second generation of mainstream currency crisis theory assume that the market participants have complete information, so that the financial market is efficient. The bandwagon effect and the asymmetry of market income and punishment easily lead to herd behavior. Due to the existence of information cost, investors' behavior is based on limited information. Investors have their own information advantages. Investors are highly sensitive to all kinds of information (including rumors) in the market. The emergence of any signal may change investors' expectations. The float effect will lead to sudden monetary shock to the economy with no problem in economic fundamentals; At the same time, the float effect will artificially create hot money and aggravate the crisis. In addition, the asymmetry of market return and punishment will cause investment fund agents to eliminate rights and avoid risks, and any market disturbance will lead to herding behavior. The government should fully consider this when considering whether to defend the fixed exchange rate system
2. The contagion effect mainly explains the crisis from the perspective of the relationship between countries. Due to the continuous strengthening of global integration and regional integration, especially the latter, the economic dependence of countries in the region is graally increasing, and the crisis will first spread among countries with high economic dependence. The occurrence of currency crisis in a country will give certain market signals, change investors' confidence in the currencies of countries with high economic dependence or similar economic characteristics, increase the possibility of currency crisis in these countries, and even lead to the occurrence of self realization crisis in a full sense
economists believe that there is market manipulation in the financial market. No matter in the crisis of self realization caused by rational expectation or the crisis caused by irrational herding behavior, there is the possibility that big speculators manipulate the market to make profits. Big speculators use herding behavior to make hot money increase sharply, which accelerates the outbreak of the crisis and intensifies the depth and harm of the crisis
generally speaking, the second generation of monetary crisis theory focuses on the "self realization" nature of the crisis. The theory holds that only relying on sound domestic economic policies is not enough to resist the monetary crisis. The inherent deficiency of the fixed exchange rate system makes it vulnerable to speculative attacks. The choice of fixed exchange rate system must be accompanied by capital control or restrictions on capital market transactions
the third generation of currency crisis theory
the Southeast Asian currency crisis which broke out in the second half of 1997 has aroused the attention of the academic circles. Kaminsky thinks that in essence, this is not a "new" crisis, and the original theoretical results are convincing. Other scholars, such as Krugman, think that this currency crisis is significantly different from previous currency crises in the breadth and depth of contagion, transfer and balance of payments. The original currency theory has insufficient explanatory power and should be broken through. The third generation of currency crisis theory came into being
Krugman believes that the currency crisis has an impact on the economies thousands of miles away and with little contact with each other. Therefore, multiple equilibrium exists. Some economies are highly sensitive to public confidence, and the currency crisis of these economies may be caused by the external factors that are not closely related to themselves