On The Mechanism Of The Currency Crises In Emerging Markets

Currency crises are important and current issues in international economics and Finance. This dissertation mainly delves into theoretic and empirical studies on the causes, consequences and contagion of currency crises, and develops some theoretic results.The thesis focus on following issues: the relationship of capital flows, foreign debts and currency crises; the relationship of fiscal deficits, public debts and currency crises; the currency crises under the assumption of rational government; currency crises' effect on economic output; the contagion of currency crises. In the relationship between capital flows, foreign debts and currency crises, the author considers the investment opportunity in a small open economy as a common resource, and a model is built to explain that the overutilization of investment opportunity will result in excessive capital inflows and foreign debts accumulation which trigger currency crises eventually. The author also uses mathematical models to explain how the government guarantees contribute to the over-inflows of short term foreign debts (STFD). The empirical analysis of developing countries' currency crises in 1990s, show that the capital inflows in the countries of high STFD ratio are inclined to reverse. When study on fiscal deficits, public debts and currency crises, a dynamic optimizing model is used to explain the currency crises result from fiscal deficits, and the multiple equilibira and self-fulfillment of currency crises are showed as the fiscal deficits are financed by public debts. Under the assumption of rational government, the paper builds a optimal stopping currency crises model, which applies optimal stopping theory to explaining of the condition that make government abandon fixed exchange-rate regime, and currency crises contagion is explained by the model. In the discussion of currency crises' economic effect, a model that consists of monetary market and product market is presented to unify currency crises models of three generations and to unpuzzle currency devaluation's different effects on economic output. Finally, using the correlation test of different exchange-rate returns, contagion evidence is found in 1997-98 East Asia currency crises, and the portfolio model is employed to show the factors which result in currency crises contagion.