Knowra Currency crisis Currency crisis A currency crisis is a rapid loss of confidence in a currency that can trigger sharp depreciation, reserve depletion, or the collapse of a fixed exchange-rate regime.
Speculative attack : A coordinated or self-reinforcing rush to sell an asset, often forcing a government to abandon a currency peg. Selling the pegged currency can exhaust the reserves used to defend its exchange rate.
First-generation currency crisis model : A model in which inconsistent fiscal policy gradually depletes reserves until speculators attack a fixed exchange rate. It explains crises as the predictable end of a peg undermined by persistent monetary financing.
European Exchange Rate Mechanism crisis : The 1992–1993 turmoil in Europe's exchange-rate system, marked by speculative pressure and withdrawals from its bands. Sterling's exit showed how a defended European peg could fail under sustained market pressure.
Banking crisis : A breakdown in the banking system marked by failures, runs, or severe impairment of financial intermediation. A currency crisis targets confidence in money or its exchange rate, though the two often reinforce each other.
Foreign-exchange reserves : Foreign-currency assets held by a central bank or monetary authority. Authorities spend reserves to meet demand for foreign currency while defending a threatened peg.
Second-generation currency crisis model : A model in which a government abandons a peg when its costs rise, allowing expectations to make a crisis self-fulfilling. It accounts for attacks that can occur even without an obviously exhausted reserve stock.
Mexican peso crisis : Mexico's 1994–1995 financial crisis, involving peso devaluation, capital outflows, and emergency international support. The episode illustrates how short-term foreign-currency liabilities can magnify a devaluation shock.
Sovereign debt crisis : A crisis in which a government cannot or will not meet its debt obligations on agreed terms. A sovereign default concerns public repayment; a currency crisis concerns confidence in the currency or its exchange regime.
Capital flight : Large-scale movement of financial assets out of a country, often in response to perceived risk. Residents and investors moving funds abroad intensify pressure on the exchange rate and reserves.
Third-generation currency crisis model : A family of models linking currency crises to financial-sector fragility, foreign-currency debt, and balance-sheet effects. It highlights how private borrowing and weak banks can turn exchange-rate pressure into a systemic crisis.
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