Theories of Currency and Banking Crises: A Literature Review

  • Stijn Claessens


Currency and banking crises in Latin America, Europe, and Asia over the past three decades have generated substantial literature on their causes. The literature on currency crises begins with models developed to explain crises experienced by some Latin American countries in the late 1970s. These models view currency crises as being caused by weak economic fundamentals. Following the collapse of the European Monetary System in 1992, the so-called second-generation models of currency crises emerged. These models show that currency crises can occur due to certain government policy actions, self-fulfilling expectations of market participants, and possibilities of multiple equilibriums, even in the absence of fundamental weaknesses. The theoretical currency crisis literature has expanded further since the 1997 Asian financial crisis. The so-called third-generation models view a currency crisis as a run on an economy or a financial panic.


Financial Institution Early Warning System Deposit Insurance Currency Crisis Asian Financial Crisis 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Aghion, Philippe, Philippe Bacchetta, and Abhijit Banerjee. 2000. A Simple Model of Monetary Policy and Currency Crises. European Economic Review 44 (4–6): 728–738.CrossRefGoogle Scholar
  2. Akerlof, George, and Paul Romer. 1993. Looting the Economic Underworld of Bankruptcy for Profit. Brookings Papers on Economic Activity 2: 1–73.CrossRefGoogle Scholar
  3. Allen, Franklin, and Douglas Gale. 2000. Financial Contagion. Journal of Political Economy 108 (1): 1–33.CrossRefGoogle Scholar
  4. Barth, J. R., G. Caprio Jr., and R. Levine. 2003. Bank Supervision and Regulation: What Works Best? Journal of Financial Intermediation. Forthcoming.Google Scholar
  5. Blanchard, Olivier, and Mark Watson. 1982. Bubbles, Rational Expectations and Financial Markets. In Crises in the Economic and Financial Structure, edited by Paul Wachtel. Lexington: Lexington Books.Google Scholar
  6. Burnside, Craig, Martin Eichenbaum, and Sergio Rebelo. 2001. Prospective Deficits and the Asian Currency Crisis. Journal of Political Economy 109 (6): 1155–1197.CrossRefGoogle Scholar
  7. Caballero, Ricardo J., and Arvind Krishnamurthy. 2001. International and Domestic Collateral Constraints in a Model of Emerging Market Crises. Journal of Monetary Economics 48 (3): 513–548.CrossRefGoogle Scholar
  8. Calvo, G., L. Leiderman, and C. Reinhart. 1994. Capital Flows and Macroeconomic Management: Tequila Lessons. International Journal of Finance and Economics 1 (3): 207–224.CrossRefGoogle Scholar
  9. Chang, Roberto, and Andres Velasco. 2001. A Model of Financial Crises in Emerging Markets. Quarterly Journal of Economics 116 (2): 489–517.CrossRefGoogle Scholar
  10. Chari, V., and R. Jagannathan. 1988. Banking Panics, Information, and Rational Expectations Equilibrium. Journal of Finance 43 (3): 749–761.CrossRefGoogle Scholar
  11. Chen, Y. 1999. Banking Panics: The Role of the First-Come, First-Served Rule and Information Externalities. Journal of Political Economy 107 (5): 946–968.CrossRefGoogle Scholar
  12. Chinn, M., and K. Kletzer. 2000. International Capital Inflows, Domestic Financial Intermediation and Financial Crises Under Imperfect Information. NBER Working Paper No. 7902. National Bureau of Economic Research (NBER), Cmbridge, September.CrossRefGoogle Scholar
  13. Diamond, Douglas W., and Philip H. Dybvig. 1983. Bank Runs, Deposit Insurance, and Liquidity. Journal of Political Economy 91 (3): 401–419.CrossRefGoogle Scholar
  14. Diamond, Douglas W., and Raghuram Rajan. 2002. Liquidity Shortages and Banking Crises. NBER Working Paper No. 8937. NBER, Cambridge, May.CrossRefGoogle Scholar
  15. Dooley, Michael P. 2000. A Model of Crises in Emerging Markets. Economic Journal 110: 256–272.CrossRefGoogle Scholar
  16. Fischer, Stanley. 2002. Financial Crises and the Reform of the International Financial System. NBER Working Paper No. 9297. NBER, Cambridge, October.CrossRefGoogle Scholar
  17. Flood, Robert P., and Peter M. Garber. 1984. Collapsing Exchange-Rate Regimes: Some Linear Examples. Journal of International Economics 17: 1–13.CrossRefGoogle Scholar
  18. Gorton, G. 1988. Banking Panics and Business Cycles. Oxford Economic Papers 40 (3): 221–255.Google Scholar
  19. Honohan, Patrick, and Daniela Klingebiel. 2000. Controlling Fiscal Costs of Banking Crises. World Bank Working Paper No. 2441. World Bank, Washington DC, September.Google Scholar
  20. Jacklin, C., and S. Bhattacharya. 1988. Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications, Journal of Political Economy 96 (June): 568–592.CrossRefGoogle Scholar
  21. Johnson, Simon, Peter Boone, Alasdair Breach, and Eric Friedman. 2000. Corporate Governance in the Asian Financial Crisis. Journal of Financial Economics 58 (4): 141–186.CrossRefGoogle Scholar
  22. Kindleberger, C. 1978. Manias, Panics and Crashes: A History of Financial Crises. New York: Basic Books.CrossRefGoogle Scholar
  23. Krueger, Anne O. 2002. A New Approach to Sovereign Debt Restructuring. Washington DC: International Monetary Fund.CrossRefGoogle Scholar
  24. Krugman, Paul. 1979. A Model of Balance-of-Payments Crises. Journal of Money, Credit, and Banking 11 (3): 311–325.CrossRefGoogle Scholar
  25. Krugman, Paul. 1997. Are Currency Crises Self-Fulfilling? NBER Macroeconomics Annual. 345–378. Cambridge, MA: MIT Press.Google Scholar
  26. Krugman, Paul. 1998. What happened to Asia? Mimeo. Available: Scholar
  27. Krugman, Paul. 1999. Balance Sheets, the Transfer Problem, and Financial Crises. In International Finance and Financial Crises: Essays in Honor of Robert P. Flood Jr., edited by Peter Isard, Assaf Razin, and Andrew K. Rose. Norwell, MA: Kluwer Academic Publishers.Google Scholar
  28. Miller, Marcus, and Lei Zhang. 2000. Sovereign Liquidity Crises: The Strategic Case for a Payments Standstill. Economic Journal 110 (460): 335–362.CrossRefGoogle Scholar
  29. Miron, J. 1985. Financial Panics, the Sensitivity of the Nominal Interest Rate and the Founding of the Fed. American Economic Review 76 (1): 125–140.Google Scholar
  30. Mishkin, F. 1996. Understanding Financial Crises: A Developing Country Perspective. NBER Working Paper No. 5600. NBER, Cambridge, May.Google Scholar
  31. Obstfeld, Maurice. 1986. Rational and Self-Fulfilling Balance of Payments Crises. American Economic Review 76: 72–81.Google Scholar
  32. Obstfeld, Maurice. 1996. Models of Currency Crises with Self-Fulfilling Features. European Economic Review 40 (3–5): 1037–1047.CrossRefGoogle Scholar
  33. Sachs, Jeffrey. 1994a. Russia’s Struggle with Stabilization: Conceptual Issues and Evidence. In Proceedings of the Annual Conference on Development Economics, edited by Michael Bruno and Boris Pleskovic, 57–80. Washington DC: World Bank.Google Scholar
  34. Sachs, Jeffrey. 1994b. Beyond Bretton Woods: A New Blueprint. The Economist 333 (1–7 October): 23, 25, 27.Google Scholar
  35. Salant, Stephen, and Dale Henderson. 1978. Market Anticipation of Government Policy and the Price of Gold. Journal of Political Economy 86: 627–648.CrossRefGoogle Scholar

Copyright information

© Asian Development Bank 2005

Authors and Affiliations

  • Stijn Claessens

There are no affiliations available

Personalised recommendations