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Currency Crises. Edited by Paul Krugman. Chicago: University of Chicago Press, 2000. $47.00. 356 pp. ISBN 0-226-45462-2.
A currency crisis occurs when a speculative attack on some currency forces policy officials to abandon their attempt to maintain a fixed (nominal or real) par value. Currency Crises is an edited volume containing eight essays and two panel discussions by some of the best international macroeconomists. The book stems from a February 1998 NBER conference- just seven months after the Thai baht was devalued, thereby setting off the currency and financial crises of East Asia. The timing of the conference and book could not have been improved upon, not only because of the Asian crisis, but also because the currency crisis literature has recently moved beyond "first generation" (FG) models emphasizing the exhaustion of reserves to "second generation" (SG) models emphasizing a more active role for policy officials, multiple equilibria and financial intermediation. The conference sought to take stock of the new literature and to illuminate unresolved issues. On this score the resulting volume is excellent.
As an introduction, Krugman briefly discusses the issues raised at the conference. They fall into three interrelated categories: (1) What drives crises?; (2) How should government behavior be modeled?; and (3) What are the effects of a crisis? Without question, the issue of what drives currency crises remains the most contentious. The fault line runs between those who argue crises are mostly the outcome of poor fundamentals (which may include output and unemployment, due to the SG innovation of optimizing policy officials), and those who argue that although fundamentals play a role, many crises are better understood as the consequence of self-fulfilling expectations in the face of otherwise sustainable pegs.
In Chapter 1, Barry Eichengreen and Olivier Jeanne argue that a fundamental explanation using a SG model fits the 1931 sterling crisis, which knocked Britain off the gold standard. The essay contains excellent historical detail and suggests that the SG model has wider appeal than the 1992-93 European Monetary System crisis for which it was crafted. After providing an insightful discussion on defining and modeling contagion in Chapter 2, Allan Brazen formalizes the notion of political contagion within a SG model that is consistent with the fundamentalist position. In Chapter...