Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
 
 
 
 
 
 
 
 

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11.6 CURRENCY CRISIS 
 
A currency crisis is brought on by a decline in the value 
of a country's currency. This decline in value negatively affects an 
economy by creating instabilities in exchange rates. To simplify the 
matter, we can say that crises develop as an interaction between 
investor expectations and what those expectations cause to 
happen. A currency crisis is also called a balance-of-payments 
crisis. It occurs when the value of a currency changes quickly, 
undermining its ability to serve as a medium of exchange or a store 
of value. It is a type of financial crisis and is often associated with 
a real economic crisis. Currency crises can be especially 
destructive to small open economies or bigger, Governments often 
take on the role of fending off such attacks by satisfying the excess 
demand for a given currency using the country's own currency 
reserves or its foreign reserves  Currency crises are accompanied 
with speculative attack on the currency, and at the time of attack, 
the currency is under the fixed exchange rate regime. 
Recessions attributed to currency crises include
1994 economic crisis in Mexico,
1997 Asian Financial Crisis,
1998 Russian financial crisis,  
Argentine economic crisis (1999-2002). 
 
Currency crisis: 
There were major changes in India‘s BOP position due to the 
crisis in the 1990s.
 
Crisis of early 1990s: 
Number of reasons for currency crisis in 1990 were: 
Foreign exchanger reserves where not sufficient and got 
declined 
Short term borrowings were increased resulting in higher 
obligations to pay interest on the same borrowings. It 
increased payment side of BOP greatly. 
The Gulf War of 1990led to increase in the prices of crude oil 
and petroleum products. It brought the burden on the 
payment side of the BOP too.