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Playing Monopoly with the DevilDollarization and Domestic Currencies in Developing Countries$
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Manuel Hinds

Print publication date: 2006

Print ISBN-13: 9780300113303

Published to Yale Scholarship Online: October 2013

DOI: 10.12987/yale/9780300113303.001.0001

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The Currency Origins of Financial Crises

The Currency Origins of Financial Crises

(p.136) Chapter 7 The Currency Origins of Financial Crises
Playing Monopoly with the Devil

Manuel Hinds

Yale University Press

This chapter analyzes how currency risk has been the fundamental cause of all the financial crises in developing countries, and discusses how, in all such crises, the trigger has been a currency run associated with a cycle of currency appreciation and depreciation. During these cycles, the prices of nontradables increased quickly relative to those of the tradables, leading to a boom in nontradable asset prices. Then, the prices of these assets fell, leading to a bust. The change in the direction of the shifts in relative prices has triggered a currency run, which has forced the devaluation of the currency. This, in turn, has worsened the speed of the collapse of the prices of assets. The chapter reveals that while currency runs create liquidity crises in the banks, the violent shifts in relative prices have a negative impact on the solvency of the banks.

Keywords:   currency risk, developing countries, currency appreciation, depreciation, devaluation

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