By Bjorn Rother
This publication explores the function of political elements within the incidence of foreign money crises, utilizing an eclectic process that blends case experiences, a rigorous theoretical dialogue, and econometric research.
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Additional resources for The Determinants of Currency Crises: A Political Economy Approach
We should clearly have more conﬁdence in the validity of the results presented above when these are supported by hypotheses derived from a strong body of theory, and when we see repeated evidence of these correlation patterns in a larger sample of cases. 30 The Determinants of Currency Crises I will take up these challenges in the two following chapters, ﬁrst by taking a closer look at the theory of currency crisis and the scope for enriching existing models with some of the political-economy aspects identiﬁed above, and then by testing the resulting hypotheses in a large cross-country sample.
As will be seen, the outlook for the incumbent’s re-election can play a key role in this regard. 3). 4, the focus will shift to the role of a ﬁscal policy maker in the explanation of currency crises. Based on a new model, I will argue that in some situations, this branch of government enjoys de facto veto power over exchange rate outcomes, consistent with the experience in recent crisis episodes in Argentina and Turkey. The analysis will then focus on identifying situations in which a rational ﬁscal policy maker would make use of its privileged position to force an exit from the currency peg upon the central bank, even if the latter remains committed to its defense.
S. 47 This meltdown in conﬁdence triggered a large run on private sector deposits during 28 November and 30 November, which the administration counteracted by the imposition of a wide range of controls on banking and foreign exchange transactions, including a weekly limit on withdrawals from individual bank accounts. After this harsh response from the government, the country’s major labor unions held two days of nationwide strikes that soon turned into largescale street protests and social unrest, while the opposition-controlled Chamber of Deputies repealed the emergency powers granted to the administration.