Browse

Free Currency Markets, Financial Crises and the Growth Debacle : Is There a Causal Relationship?

Cited 0 time in Web of Science Cited 0 time in Scopus
Authors
Yotopoulos, Pan A.; Sawada, Yasuyuki
Issue Date
1999-10
Publisher
Institute of Economic Research, Seoul National University
Citation
Seoul Journal of Economics, Vol.12 No.4, pp. 419-456
Keywords
reserve, hard and soft currenciesmisallocation od resourceshome-grown
Abstract
The paper develops an alternative hypothesis that attributes collateral responsibility for the recent spate of financial crises to a basic flaw of the architecture of the international financial system, free markets for foreign exchange. A valid positional distinction between reserve/hard and soft currencies, based on reputation, accounts for the systematic substitution of the former currencies for a country's soft currency in liquid asset holdings. The result of this "asymmetric reputation" in an environment of free currency markets is the systematic devaluation of soft currencies. Moreover, bubbles, devaluations and financial crises, far from being self-correcting monetary phenomena, can lead to sharp contractions in the economy through the misallocation of resources in competitive devaluation trade, as opposed to comparative advantage trade. In a case that is parallel to asymmetric information and incomplete credit markets, the appropriate policy intervention in asymmetric- reputation driven incomplete currency markets is maintaining mildly repressed exchange rates. The operational definition of "mild" is imposing restrictions on currency substitution, whether it is home-grown or it is the result of foreign financial capital taking short positions on the local currency.
ISSN
1225-0279
Language
English
URI
http://hdl.handle.net/10371/1166
Files in This Item:
Appears in Collections:
College of Social Sciences (사회과학대학)Institute of Economics Research (경제연구소)Seoul Journal of EconomicsSeoul Journal of Economics vol.12(4) (Winter 1999)
  • mendeley

Items in S-Space are protected by copyright, with all rights reserved, unless otherwise indicated.

Browse