What is currency crisis (or financial crisis)? What are the major stages of a fi

Question

What is currency crisis (or financial crisis)? What are the major stages of a financial bubble? Use one example (Mexican peso crisis, Asian financial crises, Argentine financial crisis, or 2008 financial crisis) to illustrate these stages. What major causes can you identify for the financial crises during the last decade? How does the "Mundel Trilemma" (or the "unholy trinity", pp. 255-257) create challenge to policy options? Facing a financial crisis, what can the IMF and the affected state do to alleviate the crisis? What lessons can be learned from the past financial crises?

Explanation / Answer

Currency crisis refers to a situation where the value of a currency becomes unstable and difficult for used as medium of exchange.

Financial bubble is a situation where prices for securities rise far above their actual value

Stages of financial bubble is summarized below-

The Mexican peso crisis or Tequila crisis was a currency crisis due to devaluation of peso against U.S. dollar in December 1994. The Mexican treasury starts shot-term debt, to attracting foreign investors. As a result it becomes causes of risk premium for investors. To maintain the Mexican peso’s peg to the U.S dollar Mexican central bank intervened in the foreign exchange markets and issue dollar-denominated public debt to buy pesos.

These steps make peso more valuable and caused demand for imports to increase, and trade deficit.

Causes of financial crisis during last decade-

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