Currency Crashes in Industrial Countries: Much Ado About Nothing?

Abstract

Sharp exchange rate depreciations, or currency crashes, are associated with poor economic outcomes in industrial countries only when they are caused by inflationary macroeconomic policies. Moreover, the poor outcomes are attributable to inflationary policies in general and not the currency crashes in particular. On the other hand, crashes caused by rising unemployment or external deficits have always had good economic consequences with stable or falling inflation rates.

Keywords: Exchange rate, depreciation, inflation, unemployment, current account

JEL Classification: F31, F32, F41