O'Reilly logo

Handbook of Exchange Rates by Lucio Sarno, Ian Marsh, Jessica James

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

25.1 Introduction

There are two schools of thought concerning economic crises in general and currency crises in particular. In the first, the pre-1978 orthodoxy, economic crises are attributed to arbitrary big shifts in expectations or sudden large disturbances. This view of crises is intellectually comfortable because it associates a big effect with a big shock. Moreover, since the roots of the crises are either outside the realm of economics or due to large unforecastable disturbances, there is little additional work to be done by empirical economists tracing crises back to economic fundamentals. We credit Mackay (1852, reprinted in 2008) and Kindleberger (1978, reprinted in 2000) and other secondary-sourced compilations of amusing anecdotes with developing and preserving this mindset.1

The second school, which we call the fundamentals approach to crises, was developed by researchers working at the Board of Governors of the Federal Reserve System (the Fed) in the late 1970s and early 1980s.2 This approach was pioneered by Salant and Henderson (1978) (S&H), who challenged orthodoxy by developing a model of a predictable crisis in which speculators' self-interest leads to market-based dismantling of unsustainable government policies. In the S&H fundamentals approach, there is still room for big shocks to have big effects—but observing a crisis does not necessarily lead researchers to look for big precipitating shocks or arbitrary and self-serving or self-fulfilling expectations ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required