Currency Crises and Instability of Global Capitalism

  • Korkut A. Ertürk
Part of the International Papers in Political Economy Series book series (IPPE)


The chapter argues that currency crises are best explained as episodes of asset price bubbles that emerge under conditions of economic liberalization. Three destabilizing processes which correspond to different phases of an asset price bubble are underscored as general features of a currency crisis: overborrowing, overinvestment and capital flow reversals. The relative importance of these processes varies as currency crises have evolved over time. Excessive credit expansion and over-borrowing were the destabilizing processes that have played a decisive role in current account driven crises, where capital inflow was predominantly governed by arbitrage opportunities and its reversal tied to rising devaluation risk associated with reserve depletion. Starting with the late 1980s, capital account driven crises have come to predominate as variable price assets, such as bonds and stocks, as opposed to fixed price assets in the form bank loans, became the main conduits of the capital inflow. In these crises, portfolio dynamics driven by speculative expectations on variable price assets, along with the increased predictability of asset prices, set the stage for destabilizing trend speculation on the part of international investors. Foreign investors chased a rising trend of asset prices, and capital flow reversed when they begin to think that asset prices have peaked.


Interest Rate Asset Price Capital Flow Capital Inflow Current Account Deficit 
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, P., Bacchetta, P. and Banerjee, A. (2001), ‘Currency Crises and Monetary Policy in an Economy with Credit Constraints’, European Economic Review, 45(7), 1121–50.CrossRefGoogle Scholar
  2. Aghion, P., Bacchetta, P. and Banerjee, A. (2000), ‘A Simple Model of Monetary Policy and Currency Crises’, European Economic Review, 44(4–6), 728–38.CrossRefGoogle Scholar
  3. Akamatsu, K. (1945), ‘Shinkookoku Sangyoo Hatten No Bankoo Keitai’ [‘The Flying Geese Pattern of the Development of Newly Rising Countries’], 299–314, in Keizai Shinchitsujo No Keisei Genri [Constituting Principles of the New Economic Order], Tokyo: publisher unknown.Google Scholar
  4. Akamatsu, K. (1932), ‘Waga Kuni Keizai Hatten No Shuku Gooben Shoohoo’, [‘The Synthetic Principles of the Economic Development of Our Country’], 179–220, in Shoogyoo Keizai Ron [Theory of Commerce and Economics], Nagoya: publisher unknown.Google Scholar
  5. Allen, F. and Gale, D. (1999), ‘Bubbles, Crises, and Policy’, Oxford Review of Economic Policy, 15(3), 9–18.CrossRefGoogle Scholar
  6. Amsden, A. (1989), Asias Next Giant, New York: Oxford University Press.Google Scholar
  7. Arestis, P. and Glickman, M. (2002), ‘Financial Crisis in Southeast Asia: Dispelling Illusion the Minskyan Way’, Cambridge Journal of Economics, 26(2), 237–60.CrossRefGoogle Scholar
  8. Bahmani-Oskooee, M. and Techaratanachai, A. (2001), ‘Currency Substitution in Thailand’, Journal ofPolicy Modeling, 23(2), February, 141–5.Google Scholar
  9. Barth, M. and Dinmore, T. (1999), ‘Trade Prices and Volumes in East Asia Through the Crisis’, International Finance Discussion Paper No. 643. Board of Governors of the Federal Reserve System, Washington DC.Google Scholar
  10. Baumol, W.J. (1957), ‘Speculation, Profitability and Stability’, Review of Economics and Statistics, 39(3), 263–71.CrossRefGoogle Scholar
  11. Bernard, M. and Ravenhill, J. (1995), ‘Beyond Product Cycles and Flying Geese: Regionalization, Hierarchy, and the Industrialization of East Asia’, World Politics, 47(2), 171–209.CrossRefGoogle Scholar
  12. Bhagwati, J. (1958), ‘Immiserizing Growth: A Geometrical Note’, Review of Economic Studies, 25(3), 201–5.CrossRefGoogle Scholar
  13. Blomqvist, H. (1996), ‘The “Flying Geese” Model of Regional Development: A Constructive Interpretation’, Journal of the Asia Pacific Economy, 1(2), 215–31.CrossRefGoogle Scholar
  14. Booth, A. (1999), ‘Initial Conditions and Miraculous Growth: Why is South Asia Different From Taiwan and South Korea?’, World Development, 27(2), 301–21.CrossRefGoogle Scholar
  15. Bossaerts, P. (2002), The Paradox of Asset Pricing, Princeton, NJ: Princeton University Press.Google Scholar
  16. Calvo, G. and Vegh, C. (1999), ‘Inflation Stabilization and BOP Crises in Developing Countries’, NBER Working Paper Series, No. 6925.CrossRefGoogle Scholar
  17. Chang, H. (1998), ‘Korea: The Misunderstood Crisis’, World Development, 26(8) 1555–61CrossRefGoogle Scholar
  18. Chang, R. and Velasco, A. (1999), ‘Liquidity Crises in Emerging Markets: Theory and Policy’, NBER Working Paper Series, No. 7272.CrossRefGoogle Scholar
  19. Chang, H., Park, H. and Yoo, C.G. (1998), ‘Interpreting the Korean Crisis: Financial Liberalization, Industrial Policy and Corporate Governance’, Cambridge Journal of Economics. 22(61. 735–46.Google Scholar
  20. Chen, J. (2004), ‘The Basle Accord and Macroeconomic Activity’, in J. Chen (ed.), The Role of International Institutions in Globalisation, Cheltenham, UK: Edward Elgar.Google Scholar
  21. Civcir, I. (2003), ‘Money Demand, Financial Liberalization and Currency Substitution in Turkey’, Journal of Economic Studies, 30(5–6), 514–34.CrossRefGoogle Scholar
  22. Cline, W. (1982), ‘Can the East Asian Model of Development be Generalized’, World Development, 10(2), 81–90.CrossRefGoogle Scholar
  23. Corbett, J. and Vines, D. (1999), ‘The Asian Crisis: Lessons from the Collapse of Financial Systems, Exchange Rates and Macroeconomic Policy’, in P. Agenor, M. Miller, D. Vines and A. Weber (eds), The Asian Financial Crisis: Causes, Contagion and Consequences, Cambridge: Cambridge University Press.Google Scholar
  24. Cummings, B. (1984), ‘The Origins and Development of the Northeast Asian Political Economy: Industrial Sector, Product Cycles and Political Consequences’, International Organization 38(2), 1–40.CrossRefGoogle Scholar
  25. Eatwell, J. and Taylor, L. (2000), Global Finance at Risk, New York: The New Press.Google Scholar
  26. Edwards, S. (1996), ‘Exchange Rate Anchors, Credibility, and Inertia: A Tale of Two Cities, Chile and Mexico’, American Economic Review, Papers and Proceedings, 86(2), 176–80.Google Scholar
  27. Eichengreen, B., Rose, A. and Wyplosz, C. (1997), ‘Contagious Currency Crises’, posted at <>.Google Scholar
  28. Ekinci, N. and Erturk, K. (2004), ‘Turkish Currency Crisis of 2000–1, Revisited’, CEPA Working Paper Series, No. 2004–01.Google Scholar
  29. Ertiirk, K. (2001–2), ‘Overcapacity and the East Asian Crisis’, Journal of Post Keynesian Economics, 24(2), 253–75.Google Scholar
  30. Fama, E. (1965), ‘The Behavior of Stock Market Prices’, Journal of Business, 38(1) 34–105.CrossRefGoogle Scholar
  31. Flood, R. and Rose, A.K. (1999), ‘Understanding Exchange Rate Volatility without the Contrivance of Macroeconomics’, Economic Journal, 109(458), F660-F672.CrossRefGoogle Scholar
  32. Flood, R. and Garber, P.M. (1984), ‘Collapsing Exchange Rate Regimes: Some Linear Examples’, Journal oflnternational Economics, 17(1–2), 1–13.Google Scholar
  33. Friedman, M. (1953), ‘The Case for Flexible Exchange Rates’, Essays in Positive Economics, Chicago: Chicago University Press.Google Scholar
  34. Furman, J. and Stiglitz, J. (1998), ‘Economic Crises: Evidence and Insights from East Asia’, Brookings Papers on Economic Activity, 2, 1–135.CrossRefGoogle Scholar
  35. Gil-Diaz, F. and Carstens, A. (1996), ‘One Year of Solitude: Some Pilgrim Tales About Mexico’s 1994–5 Crisis’, American Economic Review, Papers and Proceedings, 86(2), 164–9.Google Scholar
  36. Godley, W., Izurieta, A. and Zezza, G. (2004). ‘Prospects and Policies for the US Economy: Why Net Exports Must Now Be the Motor for US Growth’, Strategic Analysis, Levy Economics Institute.Google Scholar
  37. Gordon, R. (2000), ‘The Aftermath of the 1992 ERM Breakup: Was There a Macroeconomic Free Lunch?’, in P. Krugman (ed.) Currency Crises, New York: University of Chicago Press.Google Scholar
  38. Grabel, I. (1996), ‘Marketing the Third World: the Contradictions of Portfolio Investment in the Global Economy’, World Development, 24(11), 1761–76.CrossRefGoogle Scholar
  39. Grabel, I. (1995), ‘Speculation-led Economic Development: A Post Keynesian Interpretation of Financial Liberalization Programmes in the Third World’, International Review ofApplied Economics, 9(1), 127–49.CrossRefGoogle Scholar
  40. Griffin-Jones, S. and Spratt, S. (2002), ‘Will the proposed new Basel Capital Accord have a net negative effect on developing countries?’, posted at <>.Google Scholar
  41. Henderson, J. (1999), ‘Uneven Crises: Institutional Foundations of East Asian Economic Turmoil’, Economy and Society, 28(3), 327–68.CrossRefGoogle Scholar
  42. Isenberg, D. and Phillips, R.J. (2005), ‘Will Basel II Hurt Community Banks in the Macroeconomy?’, Paper prepared for he annual meetings of the Association for Evolutionary Economics, Philadelphia, Pennsylavania, 7–9 January, 2005.Google Scholar
  43. Johnson, C. (1995), Japan Who Governs? The Rise of Developmental State, New York: W.W. Norton.Google Scholar
  44. Kaldor, N. (1996), Causes of Growth and Stagnation in the World Economy, Raffaele Mattioli Lectures, Milano, Italy: Cambridge University Press.CrossRefGoogle Scholar
  45. Kaplinsky, R. (1999), ‘If You Want to Get Somewhere Else, You Must Run at Least Twice as Fast as That: The Roots of the East Asian Crisis’, Competition and Change, 4(1), 1–30.Google Scholar
  46. Kaplinsky, R. (1993), Export Processing Zones in the Dominican Republic: Transforming Manufactures into Commodities, World Development, 21(11), 1851–65.CrossRefGoogle Scholar
  47. Kemp, M.C. (1963), ‘Speculation, Profitability and Price Stability’, Review of Economics and Statistics, 45(2), 185–9.CrossRefGoogle Scholar
  48. Kiguel, N. and Liviatan, M. (1992), ‘The Business Cycle Associated with Exchange Rate Based Stabilization’, World Bank Economic Review, 6(2), 279–305.CrossRefGoogle Scholar
  49. Komarek, L. and Melecky, M. (2003), ‘Currency Substitution in a Transitional Economy with an Application to the Czech Republic’, Eastern European Economics, 41(4), July-August, 72–99.Google Scholar
  50. Korhonen, P. (1998), Japan and Asia Pacific Integration: Pacific Romances1968–1996, New York: Routledge.Google Scholar
  51. Korhonen, P. (1994), ‘The Theory of the Flying Geese Pattern of Development and its Interpretations’, Journal of Peace Research, 31(1), 93–108.CrossRefGoogle Scholar
  52. Krugman, P. (2000), ‘Crises: The Price of Globalization?’, in Symposium sponsored by the Federal Reserve Bank of Kansas City, Global Economic Integration: Opportunities and Challenges. Jackson Hole, Wyoming, 24–6 August.Google Scholar
  53. Krugman, P. (1999), ‘Balance Sheets and Transfer Problem, and Financial Crises’, International Tax and Public Finance, 6(4), 459–72.CrossRefGoogle Scholar
  54. Krugman, P. (1998), ‘What Happened to Asia?’, Mimeo.Google Scholar
  55. Krugman, P. (1994), ‘The Myth of Asia’s Miracle’, Foreign Affairs, 73(6), 62–78.CrossRefGoogle Scholar
  56. Krugman, P. (1979), ‘A Model of Balance of Payments Crises’, Journal of Money, Credit and Banking, 11(3), 311–25.CrossRefGoogle Scholar
  57. Kuznets, P. (1985), ‘Government and Economic Strategy in Contemporary South Korea’, Pacific Affairs,fairs, 58(1), 44–67.CrossRefGoogle Scholar
  58. Lo, A.W. and MacKinlay, A.C. (1999), A Non-Random Walk Down Wall Street. Princeton: Princeton University Press.Google Scholar
  59. Maizels, A., Palaskas, T., and Crowe, T. (1998), ‘The Prebisch-Singer Hypothesis Revisited’, in D. Sapsford and J. Chen (eds), Development Economics and Policy. The Conference Volume to Celebrate the 85th Birthday of Sir Hans Singer, New York: St. Martin’s Press.Google Scholar
  60. McKinnon, R. (1994), ‘A Common Monetary Standard or a Common Currency for Europe? Fiscal Lessons from the Unites States’, Scottish Journal ofPolitical Economy, 31(4), 337–57.CrossRefGoogle Scholar
  61. McKinnon, R. and Pill, H. (1999), ‘Exchange Rate Regimes for Emerging Markets: Moral Hazard and International Overborrowing’, Oxford Review of EconomicPolicy, 15(3), 19–38.CrossRefGoogle Scholar
  62. McKinnon, R. and Pill, H. (1998), ‘International Overborrowing: A Decomposition of Credit and Currency Risks’, World Development, 26(7), 1267–82.CrossRefGoogle Scholar
  63. McKinnon, R. and Pill, H. (1997), ‘Credible Economic Liberalization and Over-borrowing’, American Economic Review, Papers and Proceedings, 87(2), 189–93.Google Scholar
  64. Obstfeld, M. (1994), ‘The Logic of Currency Crises’, Banque de France — Cahiers Economiques et Monetaires, 43, 189–213.Google Scholar
  65. Obstfeld, M. (1986), ‘Rational and Self Fulfilling Balance of Payments Crises’, American Economic Review, 76(1), 72–81.Google Scholar
  66. Papadimitriou, D., Shaikh, A., Dos Santos, C. and Zezza, G. (2005). ‘How Fragile is the US Economy?’, Strategic Analysis, Levy Economics Institute.Google Scholar
  67. Petri, P. (1988), ‘Korea’s Export Niche: Origins and Prospects’, World Development, 16, January.Google Scholar
  68. Prebisch, R. (1950), The Economic Development ofLatin America and its Principal Problems. New York: United Nations.Google Scholar
  69. Prock, J., Soydemir, G. and Abugri, B. (2003), ‘Currency Substitution: Evidence from Latin America’, Journal ofPolicy Modeling, 25(4), June, 415–30.Google Scholar
  70. Reynolds, C. (2001), ‘A Conceptual Model of Global Business Growth in South-east Asia’, Journal of the Asia Pacific Economy, 6(1), 76–98.CrossRefGoogle Scholar
  71. Rodriguez, M. and Turner, P. (2003), ‘Currency Substitution and the Demand for Money in Mexico’, Applied Economics Letters, 10(1), January, 59–62.Google Scholar
  72. Roubini, N. (2005), ‘US-China ‘Balance of Financial Terror Game’. A Prisoner’s Dilemma Game: Hard Landing MAD (Mutual Assured Destruction) or Chinese Pre-Emption as the Likely Solution’, posted at < /uschina-balance.html>.Google Scholar
  73. Rodriguez, C.A. (1982), ‘The Argentine Stabilization Plan of December 20th’, World Development, 10(9), 801–11.CrossRefGoogle Scholar
  74. Rude, C. (2005), ‘The Role of Financial Discipline in Imperial Strategy’, in L. Panitch and C. Leys (eds) Socialist Register 2005: The Empire Reloaded, New York: Monthly Review Press,.Google Scholar
  75. Samuelson, P. (1965), ‘Proof that Properly Anticipated Prices Fluctuate Randomly’, Industrial Management Review, 6(2), 41–9.Google Scholar
  76. Sapsford, D. and Singer, H. (1999), ‘The IMF, the World Bank and Commodity Prices: A Case of Shifting Sands?’, World Development, 26(9), 1653–60.CrossRefGoogle Scholar
  77. Sarkar, P. and Singer, H.W. (1991), ‘Manufactured Exports of Developing Countries and their Terms of Trade since 1965’, World Development, 19(4), 333–40.CrossRefGoogle Scholar
  78. Shiller, R.J. (2000), Irrational Exuberance, Princeton: Princeton University Press.Google Scholar
  79. Shleifer, A. (2000), Inefficient Markets. An Introduction to Behavioral Finance, Oxford: Oxford University Press.CrossRefGoogle Scholar
  80. Shleifer, A. and Vishny, R. (1997), ‘The Limits of Arbitrage’, Journal ofFinance, 52(1), 35–55.CrossRefGoogle Scholar
  81. Shleifer, A. and Summers, L. (1990), ‘The Noise Trader Approach to Finance’, Journal ofEconomic Perspectives, 4(2), 19–33.CrossRefGoogle Scholar
  82. Singer, H.W. (1950), ‘The Distribution of Gains Between Investing and Borrowing Countries’, American Economic Review, 40(2), 473–85.Google Scholar
  83. Singh, A. (2003), ‘Capital Account Liberalization, Free Long-term Capital Flows, Financial Crises and Economic Development’, Eastern Economic Journal, 29(2), 191–216.Google Scholar
  84. Singh, A. (1997), ‘Financial Liberalization, the Stock Market and Economic Development’, Economic Journal, 107(442), 772–82.CrossRefGoogle Scholar
  85. Singh, A. (1995), ‘The Causes of Fast Economic Growth in East Asia’, UNCTAD Review1995, Geneva.Google Scholar
  86. Singh, A. and Weisse B. (1999), ‘The Asian Model: A Crisis Foretold?’ International Social Science Journal, 51(160), 203–15.CrossRefGoogle Scholar
  87. Singh, A. and Weisse B. (1998), ‘Emerging Stock Markets, Portfolio Capital Flows and Long Term Economic Growth, Micro and Macroeconomic Perspectives’, World Development, 26(4), 607–22.CrossRefGoogle Scholar
  88. Soros, G. (1987), The Alchemy of Finance: Reading the Mind of the Market, New York: Simon & Schuster.Google Scholar
  89. Steven, R. (1990), Japans New Imperialism, Hong Kong: Macmillan.CrossRefGoogle Scholar
  90. Taylor, L. (ed). (2001), External Liberalization, Economic Performance, and Social Policy, New York: Oxford University Press.Google Scholar
  91. Taylor, L. (ed.) (1999), After Neoliberalism. What Next for Latin America?, Ann Arbor, MI: Michigan University Press.Google Scholar
  92. Taylor, L. (1998), ‘Capital Market Crises: Liberalization, Fixed Exchange Rates and Market Driven Destabilization’, Cambridge Journal of Economics, 22(6), 663–76.CrossRefGoogle Scholar
  93. Temin, P. and Voth, H. (2004), ‘Riding the South Sea Bubble’, CEPR Discussion Paper, No. 4221.Google Scholar
  94. UNCTAD (1998), Trade and Development Report, 1998, Geneva.Google Scholar
  95. Vives, X. (2002), ‘External Discipline and Financial Stability’, European Economic Review, 46, 821–28.CrossRefGoogle Scholar
  96. Wade, R. (1990), Governing the Market: Economic Theory and the Role of Government in EastAsian Industrialization, Princeton, NJ: Princeton University Press.Google Scholar
  97. Williamson, J. (2001), ‘Currency Crisis. Book Review’, Journal ofEconomic Literature 39(3), 916–7.Google Scholar
  98. Wood, A. (1997), ‘Openness and Wage Inequality in Developing Countries: The Latin American Challenge to East Asian Conventional Wisdom’, World Bank Economic Review, 11(1), 33–57.CrossRefGoogle Scholar
  99. World Bank (1998), East Asia. The Road to Recovery, Washington DC.Google Scholar

Copyright information

© Korkut A. Ertürk 2005

Authors and Affiliations

  • Korkut A. Ertürk
    • 1
  1. 1.University of UtahUSA

Personalised recommendations