Currency Risk In Emerging Market Economies

The term of "currency risk" is usually used in micro finance, while is borrowed into the institution and macro policy now. Now it means the probability of the currency crisis when an economy suffers speculative attacks. Theory of currency crises appeared at the end of the 1970s, and turned to the currency crises of the Emerging Market Economies (EMEs) during the 1990s since fast development of transit economies and currency crises in the Asian NIEs in this period.By two-generation's theoretical evolution, knowledge to currency crises grows deeper. In the view of the first generation of currency crisis theory based on the balance-of-payment model, currency crises is the consequence of gradually-weakened fundamentals caused by the confliction between the policies government implements; Analyses of the second generation based on the rational decision of government point out that currency crises are caused by changes in speculators' expectations about exchange rates, and get some degree of self-fulfillment. These theories provide some scientific explanations on the Latin American Crisis in the 1980s and the ERM crisis in the early of the 1990s. But since the middle of the 1990s, along with several EMEs crises, new characters appear which couldn't be explained reasonably by those traditional theories. So economists began to study from wider views, and some cross-domain theories emerge, such as Twin Crises Theory. This trend benefits deeper knowledge, but may dilute attention to the logic of currency crisis itself.So the analyses on currency crises should focus on the interaction between speculators and governments, and correlation inside speculators, because it is these players' actions that cause the crisis. This is what the Morris-Shin theory engages in. From the view of information and strategic behaviors, it studies the act logic of speculators and government using a new method, Theory of Global Game, created by Carlsson and van Damme in 1993. The Morris-Shin theory considers the strategic complementarities as the source of the currency crisis and its self-fulfillment, while expectations and market sentiments determine the ultimate outcome of equilibrium. Two shortcomings during the development of Morris-Shin theory are those: firstly, taking the mature market economies as the background, which limits its power to explain EMEs crises; secondly, emphasizing theoretical analyses while neglecting experiments, leading to unbalanced development.Their characters should be found out at the beginning of study on EMEs and the crises, which are summarized in this article as the three: economy which keeps growing, market and structure of participants which come to mature gradually but are still unstable, and government which come to mature and rational gradually. The aim and main innovation of the article is to introduce these characters into the Morris-Shin frame and to construct the model suitable for the analysis on EMEs crises.Firstly, the growth-persistency of economy means long-term good fundamentals which always stimulate speculation, resulting in the accumulation of currency risks. Secondly, a new player comes into the currency speculation game, that is, the foreign large trader, analysis on whose growth effect is an important innovation of this article. Government and her degree of ration is an importance issue. Government can indeed manage and supervise currency risks, but to do this she must be fully rational and can match the two policies scientifically, that is, the traditional capital policy and new information management policy. Government in reality is partly rational and just trying to become full ration. During the course of this transit, her behavior will cause new currency risks, especially in EMEs.Finally, the Asian Crisis is taken as a typical case to test the conclusions of the article. By carding the basic logic of the Asian Crisis using the method this article has developed, the main cause of this Crisis emerge: the misbehavior of the EMEs government with partial ration.This conclusion has the important meaning to Chinese exchange rate regime reform.Some shortcomings unavoidable: lack of econometric analysis on the Asian Crises becase of the lack of basic data, not fully extensions of the analyses on speculators' growth effects.