A currency crisis is defined as an extreme drop in the real Exchange Rate and in foreign reserves at least 3 standard deviations below average. Warning signs include a drop in the stock market and exports, a high ratio of M2 broad money compared to foreign reserves (often because the country spreads its foreign exchange reserves to purchase and prop up its domestic currency), a rise in the ratio of short-term government debt to foreign reserves, and a drop in industrial output and GDP. See Reinhart et al, Assessing Financial Vulnerability, An Early Warning System for Emerging Markets, Institute for International Economics, 2000.

Related Posts

© 2024 Finesse Finance. All rights reserved

magnifiercrosschevron-down