The theoretical research on currency crisis began in the late 1970s, and the theory on currency crisis is also the most mature. At present, four generations of crisis models have been formed. Paul krugman constructed the earliest theoretical model of currency crisis in the article "Balance of Payments Crisis Model" published in 1979.
The first-generation currency crisis model holds that expansionary macroeconomic policies have led to a huge fiscal deficit. In order to make up the fiscal deficit, the government has to increase the money supply, while constantly throwing out foreign exchange reserves to maintain exchange rate stability. Once the foreign exchange reserves are reduced to a certain critical point, speculators will attack the country's currency and consume it in a short time. The government either floats the exchange rate or devalues the local currency. Finally, the fixed exchange rate system will collapse and a currency crisis will occur. Later, many economists improved and perfected it, and finally formed the first generation of currency crisis theory. This theory explains from the fundamentals of a country's economy that the root of currency crisis lies in the conflict between internal and external economic equilibrium. If a country's foreign exchange reserves are insufficient, the continuous monetization of the fiscal deficit will lead to the collapse of the fixed exchange rate system and eventually lead to a currency crisis. When the macroeconomic situation deteriorates, the crisis is reasonable and inevitable. It successfully explained the Latin American currency crisis in 1970s and 1980s. During the period of 1992, the pound crisis occurred. At that time, Britain not only had a large amount of foreign exchange reserves (Deutsche Mark), but also its fiscal deficit was not in harmony with its stable exchange rate. The first generation of currency crisis theory can't be reasonably explained, and economists began to look for the causes of the crisis from other aspects, and gradually formed the second generation of currency crisis theory.
The most representative model of the second-generation currency crisis was put forward by Maurice Olbers Feld in 1994. When looking for the causes of the crisis, he emphasized the self-realization nature of the crisis, introduced game theory, and paid attention to the behavioral game between the government and market participants. Obst Feld designed a game model in his article "Currency Crisis Model with Self-realization Characteristics", which explained the characteristics of self-realization crisis model under dynamic game and showed the essence of "multiple equilibrium".
The model holds that a government has multiple objectives when formulating economic policies, and multiple objectives of economic policies lead to multiple equilibriums. Therefore, the government has both the motive of defending exchange rate stability and the motive of giving up exchange rate stability. In the foreign exchange market, there are central banks and market investors. According to each other's behavior and information, both parties constantly revise their behavior choices, which in turn affects each other's next revision and forms a kind of self-improvement. When the deviation between public expectation and confidence keeps accumulating, and the cost of maintaining a stable exchange rate is greater than the cost of giving up a stable exchange rate, the central bank will choose to give up, which will lead to a currency crisis.
Scholars, represented by Obst Feld, still attach importance to economic fundamentals when emphasizing the self-promotion of the crisis. If a country's economic fundamentals are good, the public's expectations will not deviate greatly and the crisis can be avoided. At the same time, other second-generation currency crisis models believe that the crisis has nothing to do with economic fundamentals and may be caused by speculators' attacks. The speculators' attacks have changed investors' mood and expectation in the market, produced "contagion effect" and "herding behavior", and promoted the outbreak of the crisis. Currency crises happen precisely because they are about to happen.
The second-generation currency crisis theory explains the 1992 crisis well. At that time, the British government was faced with the dilemma of increasing employment and maintaining exchange rate stability, and finally gave up the floating fixed exchange rate system. 1997 The Asian financial crisis that broke out in the second half of the year presented many new features. Before this crisis, many Asian countries created the myth of economic development, and most of them implemented financial liberalization. The first and second generation models can't explain the financial crisis well. What is even more incomprehensible is that the economies of these countries and regions (especially South Korea) have achieved economic recovery in a short time after the crisis, and some aspects are even better than before the crisis.
The third generation currency crisis model was first put forward by McKinnon and Krugman, which emphasized an important phenomenon ignored by the first and second generation models: moral hazard is widespread in developing countries. The general moral hazard is attributed to the implicit guarantee of the government to enterprises and financial institutions, and the nepotism between the government and these enterprises and institutions. This led to the expansion and imprudence of investment in the process of economic development, and a large amount of funds flowed to the stock and real estate markets, resulting in financial surplus and economic bubble. When the bubble bursts or is about to burst, capital flight will trigger a currency crisis.
The third generation currency crisis theory appeared late, but researchers generally believe that the fragile internal economic structure and kinship politics are the key to this crisis. Hyman P Minsky systematically analyzed the inherent fragility of finance and put forward the "financial instability hypothesis". He divided the borrowers in the market into three categories: the first category is "hedge financing units". The expected income of such borrowers not only exceeds the total debt, but also the cash inflow is greater than the principal and interest of each maturity debt. The second category is speculative stock trading. The expected income of this kind of borrower exceeds the debt in total, but in the first period after borrowing, its cash flow is less than the principal and interest of the debt due, and in the subsequent periods, its cash inflow is greater than the principal and interest of the debt due. The third category is Ponzi Company, the borrower whose cash inflow in each period is less than the principal and interest of the debt due, and whose income is enough to repay all the principal and interest of the debt only in the last period. As a result, they continue to borrow new debts to pay off old debts, and regard "the admission fee of the latecomers as the investment income of the latecomers", which makes the debts accumulate more and more, and the latent crisis is getting bigger and bigger.
At the beginning of an economic cycle, most borrowers are "hedging" borrowers. When the economy turns from expansion to contraction, the profitability of borrowers decreases, and they gradually turn into "speculative" borrowers and "Ponzi" borrowers, and the financial risks increase. Therefore, the financial system is inherently unstable, and the economic development cycle and economic crisis are not caused by external shocks or failed macroeconomic policies, but the only way for economic development. Souter (1986) put forward the theory of comprehensive national debt from the perspective of economic cycle: with the economic prosperity and the expansion of international lending scale, the capital of central countries (usually developed countries with abundant capital) flows to marginal countries (usually developing countries) with insufficient capital in pursuit of higher returns, and the investment foreign debts of marginal countries increase; A large amount of debt accumulation leads to an increase in the debt service burden of debtor countries. When the economic cycle enters a trough, the export income of primary products that marginal countries rely on to pay their debts decreases, which leads to their gradual loss of solvency and eventually a debt crisis.