Currency Crisis-Case Study

Harvard Business School 9-799-088
Rev. March 28, 1999
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Currency Crises
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In the last decades of the twentieth century, currency crises have plagued countries around the
world. Major incidents include: the collapse of the Bretton Woods agreement in 1971; the Latin
America crisis in 1982; the near collapse of the European Monetary System in 1992-93; the peso crisis
in Mexico in 1994; and the Asian financial crisis in 1997-98. Currency crises are not a new
phenomenon, but they do appear to have become more frequent in recent years. Paul Krugman, a
leading international economist, estimates that a major currency crisis occurs, on average, once every
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19 months.1
The causes and consequences of currency crises are not well understood and are the subject of
intense research and debate among economists, policymakers, and investors. While crises have
proven extremely difficult to predict, a few general lessons have emerged. This case has two
purposes. First, it provides a brief historical review of several currency crises. Second, the case
provides a brief description of, and data on, five unidentified countries. The descriptions and data can
be used to explore the factors associated with currency crises. This case is intended to be taught with
the Harvard Business School case, Note on Currency Crises (# 799-089).
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Currency Crises, A Brief Historical Review
Since 1970, the world financial system has been buffeted by a series of currency crises. This
section briefly reviews the events leading up to six crises.
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Bretton Woods Agreement In 1944, following the end of WWII, world leaders gathered in Bretton
Woods, New Hampshire with the goal of redesigning the world financial system. These leaders,
representing the western victors of World War II, established a system that fixed the value of
participating countries’ currencies to each other. The Bretton Woods Agreement provided that each of
the forty-four signatory nations would fix the value of its currency to the U.S. dollar and would
maintain this parity within a ±1 percent band. The United States, in turn, committed itself to maintain
the value of the dollar at $35 per ounce. All countries agreed to intervene to defend the values of their
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currencies and the United States agreed to exchange dollars for gold at $35 per ounce. The system
allowed members to use the U.S. dollar as a reserve currency, while the United States held gold
reserves for the entire system. The Bretton Woods Agreement also established the International
Monetary Fund (IMF) and the World Bank. The IMF’s role was to monitor the system and provide
short-term loans to countries experiencing balance-of-payments difficulties.
The Bretton Woods system came under pressure in the late 1960s when the United States began to
run persistent and large current account deficits, in effect, exchanging dollar bills for goods and
services. This caused some central banks to exchange dollar holdings for U.S. gold reserves. By the
end of the decade, the foreign dollar liabilities of the United States had become much larger than the
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Research Associate Brian P. Irwin prepared this case under the supervision of Professor Robert E. Kennedy as the basis for
class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
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799-088 Currency Crises
U.S. gold reserves and speculation grew that the dollar–gold parity would be changed. Faced with a
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loss of confidence in the system, U.S. President Richard Nixon suspended gold convertibility in
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August 1971, effectively ending the Bretton Woods era.
Smithsonian Agreement In December 1971, the IMF attempted to re-establish the gold standard.
The dollar–to–gold exchange rate was increased to $38 per ounce, an effective 8.6% devaluation. At
the same time, the parities between the dollar and other currencies were realigned and the fluctuation
bands were increased to 2.25%. However, speculative pressure against the dollar soon resumed and,
in February 1973, the United States changed the parity to $42.22 per ounce, an 11.2% devaluation.
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Speculation persisted and over the next month countries began to abandon the system. By March, the
currencies of the all the major industrial nations were floating against each other. Following the
breakdown of Bretton Woods and Smithsonian agreements, many countries in Latin America, Asia,
and Africa re-established pegs to a single currency or a basket of currencies (see exhibit 1).
Mexico 1982 Mexico maintained a fixed nominal exchange rate from 1954 to 1975, a period when
inflation was moderate. In the run-up to the 1976 presidential election, however, excessive monetary
expansion led to inflation which, in turn, necessitated a realignment.2
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Between 1976 and 1980, the Mexican government maintained a fixed nominal exchange rate.
However, inflation during the period caused the real exchange rate to appreciate substantially. 3 GDP
growth was strong until 1980, but then began to slow. In addition, both the current account deficit (as
a percentage of GDP) and the government deficit increased considerably. (see exhibit 2).
These trends made foreign investors nervous and from 1980 to 1982, capital flight was estimated
at US $17.3 to US $23.4 billion.4 The government devalued the peso by 68 percent in February 1982 in
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an effort to stem the outflow, but this appeared to cause more panic. Capital flight continued and, in
August, Mexican authorities suspended payments on international loans. The government was forced
into a further 100% devaluation in December.
European Monetary System 1992-93 In March 1979, the European Community (EC) established
the European Monetary System (EMS), a currency arrangement established to limit exchange-rate
fluctuations among nine EC countries.* Under the EMS, member nations maintained fixed exchange
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rates among themselves, while floating freely against other currencies.† The EMS required each
participating country to maintain the value of its currency within 2.25% of a target value against the
other participating currencies (the Italian lira was allowed to fluctuate in a 6% band). Although parity
levels within the EMS were adjusted periodically (eleven times between 1979 and 1987), the system
appeared to reduce exchange rate volatility and the bands were maintained at 2.25%. There were no
adjustments between 1987 and the fall of 1992. Because of Germany’s persistently low inflation and
the confidence that investors had in the Bundesbank (Germany’s central bank), the German
deutschmark (DM) became the de facto anchor to the system.
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Following German reunification in 1990, government spending increased sharply and tensions
within the system increased dramatically. In response to expansionary fiscal policy, the Bundesbank
tightened monetary policy. This raised the value of the DM, and because of the currency link, put
pressure on other EMS members to raise their interest rates. Other member countries were reluctant
to do so because their economies were growing slowly. Other EMS central banks were faced with a
choice between inducing a domestic recession or saving the EMS.5 Because of this tension, investors
began to speculate about a realignment and several EMS currencies faced speculative attacks when
they reached the bottom of their trading bands.6
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* The EMS also created a new monetary unit of account, the European Currency Unit (ECU) that was a
composite of all the EC currencies. Several countries later joined the system: Spain in June 1989; the United
Kingdom in October 1990; and Portugal in April 1992.
† The mechanism in which the currencies were linked was referred to as the Exchange Rate Mechanism (ERM).
To simplify terminology and avoid confusion, I refer to the EMS in the text, although some references
technically apply to the ERM.
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Currency Crises 799-088
When speculators attacked the pound on September 16, 1992, the British government defended its
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currency by raising interest rates from 10% to 12% and then to 15%. Continued selling, however, led
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the government to abandon its peg the next day.
Foreign selling forced Italy to devalue the lira by 7% on September 13, 1992, but this did little to
restore confidence. Continued selling led the Italian government to pull the lira out of the EMS
shortly after the United Kingdom. Spain experienced problems as well and implemented a series of
small devaluations*, however, it remained within the EMS. Over the next several years, growth in
Britain and Italy was much better than most countries that remained in the EMS (see exhibits 3 and 4
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for a review of the macroeconomic situation in the U.K. and Italy).7 The experience of Italy and the
United Kingdom following the EMS crisis has led some scholars to call their departure a “positive
event.”8 The EMS remained in place after Italy and Britain left, but the pressures remained.
There was much speculation that France would also be forced to leave the system, but the central
bank raised interest rates and the franc remained in the EMS. Membership came, however, at a high
cost. GDP growth between 1992 and 1996 averaged only 1.2%. In August 1993, the bands around
targeted parity rates were widened to ±15 percent.
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Mexico 1994 Between 1988 and 1994, Mexico implemented a series of major economic
reforms¾including trade liberalization, privatization, deregulation, and macroeconomic stabilization.
Fiscal balance was achieved in 1992, inflation was reduced to single digits, and the reforms dismantled
layers of protection and regulation.9 The international financial community heralded Mexico as model
reformer and capital inflows grew rapidly. Between 1990 and 1993, Mexico received more than half of
all foreign investment flows to Latin America¾$91 billion.10
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Despite the international enthusiasm, economic performance was mixed. Real GDP growth was
moderate, averaging only 2.8% between 1988 and 1994—significantly lower than either Chile (7.1
percent) or Columbia (4.1 percent); productivity growth was almost flat until 1993; the current account
deteriorated, moving from a $4.2 billion surplus in 1987 to a deficit of more than $29 billion at the end
of 1994; and the real exchange rate appreciated by 36% between 1988 and 1993. Mexico adjusted the
exchange rate several times, and implemented an exchange rate band with a fixed nominal ceiling and
a sliding floor (see exhibit 5).
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A series of political shocks played an important role in the run-up to the 1994 peso crisis. On
January 1, 1994, a rebel uprising erupted in the southern state of Chiapas. In March, the presidential
candidate for the ruling political party (PRI) was assassinated. Tragedy struck the country again in
September when the secretary general of the PRI was assassinated. These political shocks increased
domestic interest rates sharply. Because it felt the shocks were temporary, the treasury began to issue
shorter-term debt instruments and to refinance maturing Cetes (peso denominated debt obligations)
into Tesobonos (dollar denominated securities).
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When the Zedillo administration took office on December 1st, foreign currency reserves stood at
$12.5 billion, with short-term public debt of more than $27 billion, about 70 percent of it in
Tesobonos.11 Reserves had been declining throughout the year, but the outflows had accelerated in
November and continued in December. On December 20, 1994, in the wake of enormous capital
outflows, Mexico was forced to devalue the peso, which quickly led to a complete free float.
In the days following the collapse, the central bank raised interest rates to a peak of 80% in order
to combat soaring inflation rates. These high rates led to a sharp contraction in domestic demand, and
real GDP fell by 6.2 percent in 1995.
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Southeast Asia 1997 Many Asian nations experienced strong economic growth during the early
and mid 1990s. Between 1990 and 1996, GDP growth averaged nearly 8% in Indonesia, South Korea,
* Spain devalued the peseta by 5% in September 1992, 6% in November 1992, and 8% in May 1993.
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Malaysia, and Thailand. The Philippines grew at an average rate of 3%. During the 1990s, all five of
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these countries (the Asian-5) utilized fixed exchange rate systems.*
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The Asian-5 also experienced from huge capital inflows during the 1990s. As a percentage of
GDP, capital flows to these countries rose from an average of 1.4% in 1986-1990 to 6.7% between 1990-
96 (see exhibit 6).12 Except for Malaysia, the bulk of capital inflows came from offshore borrowing by
banks and private corporations.13 Despite strong GDP growth and large capital inflows, some
disturbing trends developed in the mid-1990s. As a group, the Asian-5 nations faced rising current
account deficits, declining growth in exports, and currency appreciation.
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These trends, and perceived weakness in the regions’ financial system, led some investors to
speculate about devaluations. This led to increases in domestic interest rates and declines in foreign
currency reserves. A spike in Thai interest rates caused property prices to decline, which led to the
collapse of several financial companies that had lent heavily to property companies.14 As speculation
continued, the Thai central bank chose to float the baht on July 2, 1997. This led to panic selling of
other currencies and, quickly, to further devaluations throughout the region. The Philippines floated
its peso on July 11, and Indonesia abandoned its dollar peg and allowed the rupiah to float on August
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15. South Korean expanded the won’s trading bands from 2.25% to 10% in November, but eliminated
the bands entirely in early December. Investors quickly lost faith in the region, which led to enormous
capital flight.†
Currency Crisis Exercise

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Country A¾is an industrialized nation and an OECD member. Although its economy is one of the
largest in the OECD, it is only one-sixth the size of the United States. Manufacturing is the largest
single sector of the economy. GDP is composed of high levels of consumption, but a somewhat
low contribution from the external sector and from gross fixed investment. The economy entered
a recession this year, leading to a 2% decline in GDP. Real interest rates have been relatively high
in recent years, averaging nearly 6%. Country A has had persistent trade and current account
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deficits. Foreign exchange reserves have fluctuated mildly over the last six years, averaging 4.2%
of GDP. The government budget has reversed from a surplus of 1.5% of GDP three years ago to a
1% deficit at the end of this year. Its currency informally shadowed a single major currency until
it formally joined a cooperative arrangement about a year ago.
Country B¾is a developing country that is well-endowed with natural resources. About 20 years ago
the country experienced de-industrialization, which was followed by a currency collapse, and
then a protracted period of stagnation that ended in hyperinflation nearly five years ago. About
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three years ago, country B undertook shock therapy, which led to a manufacturing boom and
made the country a key destination for multinational corporations. Inflation has declined sharply.
Until three years ago, country B’s currency floated freely. As part of its economic reforms, the
central bank fixed the local currency to the value of another country’s currency. Under the new
system, the monetary base is fully backed by foreign exchange reserves and the central bank is
prohibited from printing money to finance government deficits. Country B has recently
experienced rapid GDP growth recently, with a combined growth in real GDP of nearly 40% over
the last five years.
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* The Philippines pegged the peso to the dollar, and Thailand pegged the baht to a basket of currencies. The
other three countries used crawling pegs. Indonesia allowed the rupiah to depreciate against the dollar,
Malaysia allowed the ringgit to appreciate moderately against a basket of currencies, while South Korea
pegged the won to an undisclosed basket of currencies.
† Between 1996 and 1997, net private capital flows to the Asian-5 reversed from positive $93 billion to negative
$12.1 billion. [Sachs and Radelet (1998), p. 5]
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About a month ago, country B suffered a speculative attack after another country in the region
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devalued its currency. As a result of the shock in the other country, capital inflows into country B
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declined markedly, economic activity contracted, and many analysts predicted a recession that
could lead to unemployment of 20 percent. The government proposed to remove all investment
barriers in order to encourage capital inflows, and to eliminate all exchange controls, registration
requirements, and taxes on capital gains and dividends. This would make country B’s capital
account one of the most open in the world. However, the economy itself has remained relatively
closed, with a low foreign trade component.
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Country C¾ ¾ is a small developing nation with one of the smallest economies in its region. The
economy is very diversified, with manufacturing, agriculture, fishing and forestry, and the service
sector all contributing roughly equivalent percentages of GDP. Country C is a relatively poor
nation, registering one of the highest rates of people living at or below the poverty line in the
region. Over the last ten years, following decades of protectionism, Country C initiated a
program of economic reforms. Among the aims of the reforms were: import and foreign exchange
liberalization, tariff restructuring, tax reform, privatization, and an opening to foreign investment.
Two years ago, the government achieved a budget surplus, which it has since maintained. Its
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currency is pegged to the U.S. dollar, creating a stable nominal exchange rate over the last six
years. During the last decade, the trade deficit increased annually, which led to a growing current
account deficit. However, the current account deficit was more than covered by large capital
inflows and reserves have been rising for the last five years. Investors found Country C a good
place to invest in the 1990s, as portfolio investments rose strongly.
Country D¾undertook an export-oriented industrialization drive more than thirty years ago. Last
year, exports of merchandise goods represented 26.5% of current-price GDP. Over the last few
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decades, the country has moved towards increased liberalization and internationalization of its
economy and was admitted to the OECD this year. While much progress was made in other parts
of the economy, the government has been slow to liberalize its financial sector. The central bank
pegged the currency to a basket of currencies and allows it to float within a 2.25% band.
GDP growth over the last five years averaged more than 7% annually. Country D has consistently
had a trade deficit, registering only one surplus in the last seven years. Although the current
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account registered a surplus three years ago, it returned to a deficit the next year, and in the last
year recorded the largest deficit ever. Until recently, the government heavily regulated both the
inflow and outflow of capital in an effort to avoid a rise in the nominal exchange rate. It is
currently easing rules governing FDI. Until recently, Country D had low levels of foreign debt.
However, total external debt has risen in recent years as the government encouraged banks and
companies to borrow abroad.
Country E¾undertook a major economic transition program seven years ago. The government
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implemented a tough macroeconomic stabilization plan, liberalized the domestic economy, and
devalued and then fixed the nominal value of the currency. In the first two years after reform,
Country E experienced its most severe recession since World War II. The economy began to grow
about four years ago. Inflation, although still high, has declined substantially. Country E has
attracted growing amounts of foreign investment in recent years.
After holding the fixed exchange rate for two years, Country E implemented a crawling peg
exchange rate system. The inflation-adjusted value of the currency has increased by 35% in the
last five years. In recent years, import growth has outpaced export growth, leading to a
deterioration of the trade balance and pushing the current account into deficit. Despite this,
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foreign currency reserves have increased from US$5.7 billion two years ago to US$17.7 billion.
Country E joined the Organization for Economic Cooperation and Development (OECD) this year.
5
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Exhibit 1 Exchange Rate Arrangements (As of December 31, 1997)1
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1991 1992 1993 1994 1995 1996 1997 19986
Currencies pegged to:
U.S. Dollar 24 24 21 23 22 21 20 20
French Franc 14 14 14 14 14 14 15 15
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Russian Ruble - 6 - - - - - -
Other Currency 4 6 8 8 8 9 11 12
SDR 6 5 4 4 3 2 3 4
Other Currency Composite2 33 29 26 21 19 20 17 13
Flexibility limited vis-à-vis a single 4 4 4 4 4 4 4 4
currency3
Cooperative Arrangements4 10 9 9 10 10 12 12 13
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Adjusted according to a set of indicators 5 3 4 3 2 2 - -
Managed floating 27 23 29 33 44 45 46 56
Independently floating5 29 44 56 58 54 52 53 45
Total 156 167 175 178 180 181 181 182
1 For members with dual or multiple exchange markets, the arrangement is that in the major market.
2 Comprises currencies that are pegged to various “baskets” of currencies of the members’ own choice, not SDR.
3 Exchange rates of all currencies have shown limited flexibility in terms of the U.S. dollar.
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4 Pertains to the cooperative arrangement maintained under the European Monetary System.
5 Starting May 24, 1994, the Azerbaijan authorities ceased to peg the manat to the Russian ruble and the
exchange arrangement was reclassified to “independently floating.”
6 Through QIII
Source: International Financial Statistics, International Monetary Fund, March 1999, p. 8.

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Exhibit 2 Mexico 1982
1977 1978 1979 1980 1981 1982

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GDP (1990 pesos m) 457,828 495,626 541,012 586,050 632,620 629,139

Current Account ($ m) -1,853 -3,171 -5,459 -10,750 -16,061 -6,307
Current Account/GDP (%) -2.28 -3.08 -4.06 -5.46 -6.86 -6.23
Trade Balance ($ m) -1,021 -1,746 -2,830 -3,385 -3,846 6,795
Exchange Rate (P/$; year average) .02257 .02277 .02280 .02295 .02451 .05640
Credit Creation (%) 141.2 32.1 34.9 39.0 48.8 96.6
Reserves less gold ($ m) 1,649 1,842 2,072 2,960 4,074 834
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Months of Imports 3.5 2.8 2.0 1.9 2.0 0.7

Government Def/Sur (P m) -62 -62 -102 -134 -393 -1,453
All values are year-end
Adapted from: International Financial Statistics Yearbook, IMF. 1994, p. 516-519.
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Exhibit 3 United Kingdom, 1993
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1988 1989 1990 1991 1992 1993
GDP (1990 pound billions) 537.22 548.94 551.12 540.31 537.45 548.59
Current Account ($ b) -29.32 -36.66 -32.49 -14.24 -18.36 -16.21
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Trade Balance ($ b) -38.16 -40.54 -32.74 -18.27 -23.43 -20.24
Exchange Rate (Pound/$; average) 0.5614 0.6099 0.5603 0.5652 0.5664 0.6658
Real Effective Exchange Rate 105.9 100.4 100.0 103.5 99.6 91.4
Credit Creation (%) 21.6 24.3 11.0 2.4 3.3 3.8
Reserves less gold ($ b) 44.11 34.77 35.86 41.89 36.64 36.78
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Government Def/Sur (Pound m) 7,284 7,971 4,000 -5,689 -29,995 -40,610
All values are year-end, unless otherwise indicated.
Adapted from: International Financial Statistics Yearbook, IMF, 1997, p.846-849.
Exhibit 4 Italy, 1993
1988 1989 1990 1991 1992 1993

GDP (1990 Lira tr) 1,247.0 1,282.9 1,310.7 1,325.6 1,333.1 1,317.7
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Current Account ($ m) -7,181 -12,812 -16,992 -24,749 -30,091 8,278
Current Account/GDP (%) -0.86 -1.37 -1.47 -2.00 -2.95 0.91
Trade Balance ($ m) -924 -1,664 1,139 -455 3,186 32,825
Exchange Rate (Lira/$; average) 1,301.6 1,372.1 1,198.1 1,240.6 1,232.4 1,573.7
Real Effective Exchange Rate 92.8 97.1 100.0 100.9 99.5 83.4
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Credit Creation (%) 10.27 13.59 11.02 15.84 13.39 4.06

Reserves less gold ($ m) 34,715 46,720 62,927 48,679 27,643 27,545
Government Def/Sur (Lira tr) -126 -134 -145 -149 -163 -157
All values are year-end, unless otherwise indicated. Data for 1992 and 1993 Gov. Deficit is from July, 1998 IFS
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Exhibit 5 Mexico 1994
1989 1990 1991 1992 1993 1994

GDP (1990 Peso m) 661 695 724 750 765 799
Current Account ($ m) -5,825 -7,451 -14,888 -24,442 -23,400 -29,418
Trade Balance ($ m) 405 -881 -7,279 -15,934 -13,481 -18,467
Exchange Rate (Peso/$; average) 2.4615 2.8126 3.0184 3.0949 3.1156 3.3751
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Credit Creation (%) 45.6 41.7 35.6 21.4 11.5 29.2

Reserves less gold ($ m) 6,329 9,863 17,726 18,942 25,110 6,278
Government Def/Sur (Peso m) -25,589 -19,436 -1,990 15,959 4,156 -9,927
All values are year-end, unless otherwise indicated.
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s t 799-088 -8-
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Exhibit 6 Southeast Asia: Balance of Payments (1985-96)
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South Korea Indonesia Malaysia Philippines Thailand
(% of GDP) 1985-89 1990-96 1985-89 1990-95 1985-89 1990-95 1985-89 1990-96 1985-89 1990-95
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Current Account 4.3 -1.7 -2.5 -2.5 2.4 -5.6 -0.5 -3.3 -2.0 -6.8
Balance of Trade 3.6 -1.2 5.9 4.5 13.7 3.2 -2.9 -8.7 -2.2 -4.7
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Exports 30.7 25.0 21.9 24.2 56.1 73.2 17.1 17.4 22.9 29.6
Imports -27.2 -26.2 -15.9 -19.7 -42.5 -70.0 -20.0 -26.1 -25.1 -34.3
Capital and Financial Account -2.5 2.5 3.5 4.1 0.5 9.6 1.4 5.5 4.2 10.2
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Direct Investment (net) -0.1 -0.3 0.5 1.2 2.4 6.9 1.0 1.1 1.1 1.5
Portfolio Investment (net) 0.2 1.9 -0.0 0.9 1.0 -1.0 0.2 0.3 1.2 1.5
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Equity Securities 0.0 0.8 0.0 0.5 0.0 0.0 0.0 0.0 0.8 0.7
Debt Securities 0.1 1.1 -0.0 0.4 1.0 -1.0 0.2 0.3 0.4 0.9
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Other Investment (net) -2.4 1.0 3.0 2.0 -2.8 3.8 0.2 4.0 2.0 7.1
Monetary Authorities -0.0 -0.0 0.0 0.0 0.0 0.0 -0.6 0.0 0.0 0.0
General Government -1.2 -0.3 2.6 0.5 -1.7 -0.3 2.3 1.1 0.2 -0.4
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Banks -0.8 0.1 0.0 0.4 -1.0 1.8 -0.2 1.4 0.2 3.5
Other Sectors -0.4 1.2 0.4 1.2 -0.0 2.4 -1.2 1.6 1.5 4.0
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Financing -1.7 -0.6 -0.1 -1.1 -2.9 -5.0 -1.8 -1.8 -3.0 -3.6
Reserve Assets -1.4 -0.6 -0.2 -1.0 -2.7 -5.0 -1.0 -1.7 -2.7 -3.5
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Source: Radelet, Steven and Jeffrey Sachs. “The Onset of the East Asian Financial Crisis.” Harvard Institute for International Development, March 30, 1998; Table 9.
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Exhibit 7 Country A
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-5 -4 -3 -2 -1 0
National Accounts
Consumption (% of GDP) 62.8 62.7 63.5 63.4 63.1 63.5
Investment (% of GDP) 17.1 18.0 20.3 21.0 19.2 16.1
Government (% of GDP) 21.0 20.6 19.9 19.7 20.5 21.6
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Exports (% of GDP) 25.4 25.1 22.8 23.5 24.2 23.3
Imports (% of GDP) -26.3 -26.4 -26.5 -27.7 -26.9 -24.5
GDP (domestic currency) 100.0 110.0 122.5 134.1 143.2 149.6
Real GDP (domestic currency) 100.0 104.8 110.1 112.5 112.9 110.7
GDP ($ U.S.) 100.0 139.6 150.3 146.0 187.3 189.8
Balance of Payments (% of GDP)
Trade Balance -2.48 -2.40 -4.47 -4.89 -3.08 -1.70
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Net Services 1.60 1.28 0.83 0.67 0.62 0.59
Net Factor Payments 1.20 0.80 0.95 0.70 0.23 0.01
Net Transfers -0.56 -0.71 -0.74 -0.90 -0.82 -0.23
Current Account -0.24 -1.02 -3.44 -4.43 -3.06 -1.32
Net Foreign Direct Investment -1.49 -1.97 -1.86 -0.60 1.23 -0.01
Net Portfolio Investment 0.63 8.79 3.81 -4.14 -0.74 -3.79
Other Capital Inflows*
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1.74 -3.26 2.01 8.15 2.56 5.56
Financial Balance 0.88 3.56 3.96 3.41 3.06 1.76
Overall Balance 0.64 2.54 0.52 -1.01 0.00 0.44
Reserves (% of GDP) 3.25 5.27 5.17 4.20 3.37 3.89
Months of imports covered 1.83 3.36 2.92 2.18 2.01 2.50
Exchange Rate and Money Supply
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Exchange Rate† (year -5 = 100) 100.0 94.6 100.7 99.5 93.7 95.4
Real Effective Exchange Rate
(year -5 = 100) 100.0 101.8 108.3 102.7 102.3 105.8
Growth of money + quasi-money‡ 22.6 -- 17.3 19.4 10.8 2.0
Growth of domestic credit 16.8 -- 21.6 24.3 11.0 2.4
Interest Rates
Lending Rate 10.83 9.64 10.29 13.92 14.75 11.54
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Money Market Rate 10.8 9.47 9.72 13.62 14.64 11.77

Inflation 3.47 4.12 4.83 7.79 9.53 5.90
Government Finances (% of GDP)
Revenues 36.5 36.0 36.1 35.6 37.0 37.5
Expenses 38.9 36.7 34.5 34.1 36.2 38.5
Balance -2.37 -0.68 1.55 1.54 0.73 -0.99
Index numbers (y-5=100.0) All values are year-end, unless otherwise noted.
Adapted from: 1997 International Financial Statistics Yearbook, IMF.
Do
* Includes errors and omissions

† Domestic currency/currency arrangement benchmark (year-average). An increase in index means an
appreciation of the currency.
‡ Money + quasi-money is equal to the sum of currency outside banks, demand deposits, and time, savings,
and foreign currency deposits of resident sectors other than central government.
9
t
Exhibit 8 Country B
os
-5 -4 -3 -2 -1 0
National Accounts
Government (% of GDP)
rP
Exports (% of GDP) 13.0 10.4 7.8 6.7 6.2 6.7
Imports (% of GDP) -6.6 -4.6 -6.1 -8.3 -8.2 -9.3
Real GDP (domestic currency) 100 98.7 109.0 120.3 127.8 138.7
Trade Balance -- 6.99 2.44 -0.63 -0.94 -1.50
Net Services -- -0.55 -0.88 -0.99 -1.06 -1.04
yo
Net Factor Payments -- -3.57 -2.35 -1.05 -1.13 -1.16
Net Transfers -- 0.81 0.44 0.29 0.16 0.11
Current Account -- 3.69 -0.36 -2.38 -2.97 -3.59
Net Foreign Direct Investment -- 1.49 1.35 1.75 1.26 1.06
Net Portfolio Investment -- -1.09 -0.02 0.40 10.97 1.61
Other Capital Inflows* -- -4.59 -1.42 1.16 -8.41 0.62
Financial Balance -- -4.19 -0.09 3.31 3.82 3.29
op
Overall Balance -- -0.50 -0.44 0.92 0.85 -0.30
Reserves (% of GDP) 8.10 3.72 3.31 4.36 5.35 5.08
tC
(year -5 = 100) 100.0 185.6 248.6 312.7 357.3 340.3

Growth of money + quasi-money‡ -- >100 >100 62.5 46.5 17.6
Growth of domestic credit -- >100 84.6 23.5 20.7 11.0
Interest Rates
Deposit Rate >100 >100 62 17 11 8
Money Market Rate >100 >100 71 15 6 8
No
Inflation >100 >100 >100 24.6 10.6 4.3

Revenues 4.7 4.0 4.4 5.7 6.0 5.5
Expenses 5.4 4.3 5.0 5.7 6.7 6.2
Balance -0.7 -0.3 -0.5 0.0 -0.6 -0.7
Index numbers (y-5=100.0) All values are year-end, unless otherwise noted. --Not available
Do

10
t
Exhibit 9 Country C
os
-5 -4 -3 -2 -1 0
National Accounts
rP
Exports (% of GDP) 29.4 28.7 30.8 32.9 36.4 44.3
Imports (% of GDP) -32.4 -33.5 -39.1 -39.0 -44.2 -55.1
GDP ($ U.S.) 100.0 116.1 115.0 151.5 154.2 174.1
yo
Trade Balance -6.82 -8.59 -11.48 -11.00 -12.32 -13.83
Net Services 3.93 4.45 2.92 2.96 3.34 4.29
Net Factor Payments -1.06 0.81 1.71 2.59 5.04 4.00
Net Transfers 1.76 1.49 1.29 1.31 1.21 0.72
Current Account -2.20 -1.83 -5.57 -4.13 -2.73 -4.82
Net Foreign Direct Investment 1.15 0.42 1.59 1.81 1.49 1.63
Net Portfolio Investment 0.23 0.07 -0.10 0.38 1.64 6.48
op
Other Capital Inflows* 4.53 4.43 4.69 5.21 1.30 2.00
Overall Balance 3.73 3.09 0.62 3.26 1.70 5.29
Reserves (% of GDP) 6.89 8.06 8.63 8.43 8.78 12.23
tC
(year -5 = 100) 100.0 111.0 110.5 117.5 120.5 130.2
Growth of money + quasi-money‡ 17.3 13.6 27.1 24.4 24.2 23.2
Growth of domestic credit -2.6 17.6 -- 19.0 31.3 40.3
Interest Rates
No
Lending Rate 23.1 19.5 14.7 15.1 14.7 14.9

Deposit Rate 18.8 14.3 9.6 10.5 8.4 9.7
Inflation 18.7 8.9 7.6 9.1 8.1 8.4
Revenues 17.6 17.7 17.4 19.2 18.9 19.0
Expenses 19.7 18.9 18.8 18.2 18.4 18.7
Balance -2.1 -1.2 -1.5 1.0 0.5 0.3
Index Numbers (y-5=100.0) All values are year-end, unless otherwise noted. --Not Available
Do

11
t
Exhibit 10 Country D
os
-5 -4 -3 -2 -1 0
National Accounts
rP
Exports (% of GDP) 28.1 28.8 29.2 30.0 33.3 32.7
Imports (% of GDP) -30.6 -29.8 -28.8 -30.8 -34.4 -36.7
GDP ($ U.S.) 100.0 107.9 116.6 137.2 158.9 161.1
yo
Trade Balance -2.40 -0.57 0.70 -0.74 -0.99 -3.27
Net Services -0.76 -0.94 -0.64 -0.46 -0.66 -1.35
Net Factor Payments -0.06 -0.13 -0.12 -0.12 -0.29 -0.40
Net Transfers 0.28 0.36 0.36 0.33 0.05 -0.01
Current Account -2.93 -1.29 0.30 -0.99 -1.89 -5.03
Net Foreign Direct Investment -0.11 -0.14 -0.23 -0.42 -0.39 -0.51
Net Portfolio Investment 1.08 1.90 3.03 1.57 2.57 3.32
op
Other Capital Inflows* 1.68 0.88 -2.05 1.14 1.38 2.66
Overall Balance -0.40 1.22 0.91 1.19 1.56 0.31
Reserves (% of GDP) 4.8 5.6 6.1 6.6 7.3 7.4
tC
(year -5 = 100) 100.0 105.1 106.2 108.5 112.1 112.1
Growth of domestic credit 22.6 11.7 12.8 18.4 14.7 19.4
Interest Rates
No
Lending Rate 10.0 10.0 8.6 8.5 9.0 8.8

Inflation 9.3 6.2 4.8 6.2 4.5 5.0
Revenues 17.1 18.1 19.0 19.9 20.6 21.8
Expenses 18.7 18.6 18.3 19.6 20.3 21.4
Balance -1.6 -0.5 0.6 0.3 0.3 0.5
Index Numbers (y-5=100.0) All values are year-end, unless otherwise noted.
Do
Adapted from: International Financial Statistics, November 1998, IMF.

12
t
Exhibit 11 Country E
os
-5 -4 -3 -2 -1 0
National Accounts
rP
Exports (% of GDP) 23.5 23.8 22.9 24.0 24.9 24.8
Imports (% of GDP) -25.4 -22.3 -22.0 -23.0 -24.8 -27.6
Nominal GDP (domestic currency) 100.0 141.4 192.6 260.1 353.6 448.6
Nominal GDP ($ U.S.) 100.0 98.2 98.9 116.9 157.0 170.9
yo
Trade Balance -0.96 -0.18 -4.80 -0.67 -1.42 -5.78
Net Services 0.94 1.00 0.78 3.29 3.05 2.70
Net Factor Payments -3.92 -5.75 -4.95 -2.97 -1.72 -0.85
Net Transfers 1.04 0.64 1.04 1.45 0.83 1.34
Current Account -2.91 -4.28 -7.93 1.11 0.74 -2.59
Net Foreign Direct Investment 0.40 0.92 2.33 2.14 3.12 3.52
Net Portfolio Investment 0.00 0.00 0.00 -0.72 1.02 0.24
op
Other Capital Inflows* -7.08 -2.61 1.18 -12.03 3.37 1.63
Financial Balance -6.68 -1.69 3.51 -10.61 7.50 5.39
Overall Balance -9.58 -5.97 -4.42 -9.51 8.24 2.81
Reserves (% of GDP) 4.92 5.65 5.61 6.77 12.75 14.14
tC
(year -5 = 100) 100.0 106.4 114.1 115.1 124.5 135.5
Growth of domestic credit 158.69 55.63 44.25 30.13 20.07 31.39
Interest Rates
No
Deposit Rate 53.5 37.8 34.0 33.4 26.8 20.0

Inflation 76.7 45.3 36.8 33.3 26.8 20.1
Revenues 26.1 27.4 29.5 30.0 29.3 27.5
Expenses 29.9 33.4 32.3 32.7 31.9 30.0
Balance -3.8 -6.0 -2.8 -2.7 -2.6 -2.5
Index numbers (y-5=100.0) All values are year-end, unless otherwise noted.
Do
Adapted from: International Financial Statistics Yearbook, 1998. IMF.

Government finance figures from: 1997-98 EIU Country Profile, 1997-98, Economist Intelligence Unit.

13
t
References:
os
1
Krugman, Paul. “Currency Crises.” http://www.mit.edu/krugman/www/crises.html
2
Dornbusch, Rudiger, Ilan Goldfajn, and Rodrigo Valdes. “Currency Crises and Collapses.”
Brookings Papers on Economic Activity, 2: 1995. p. 230.
rP
3
Dornbusch, Goldfajn, and Valdes (1995), p. 231.
4
5
Krugman, Paul. “Currency Crises.” http://www.mit.edu/krugman/www/crises.html
6
Husted, Steven and Michael Melvin. International Economics, third edition. Harper Collins College
Publishers, 1995, p.478.
7
Krugman, Paul. “Currency Crises.” http://web.mit.edu/krugman/www/crises.html
yo
8
9
Edwards, Sebastian. “The Mexican Peso Crisis: How much did we know? When did we know it?”
NBER Working Paper no. 6334, December 1997. p. 3.
10
Edwards (1997) p. 8.
11
Edwards (1997) p. 23.
op
12
Radelet and Sachs (1998), p. 8.
13
Radelet and Sachs (1998), p. 8.
14
This section adapted largely from Radelet and Sachs (1998), p.18-19.
tC
No
Do
14

Currency Crisis-Case Study

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Harvard Business School 9-799-088

Rev. March 28, 1999

Currency Crisis Exercise

Source: International Financial Statistics, International Monetary Fund, March 1999, p. 8.

Exhibit 2 Mexico 1982

1977 1978 1979 1980 1981 1982

GDP (1990 pesos m) 457,828 495,626 541,012 586,050 632,620 629,139

Months of Imports 3.5 2.8 2.0 1.9 2.0 0.7

Exhibit 4 Italy, 1993

1988 1989 1990 1991 1992 1993

Credit Creation (%) 10.27 13.59 11.02 15.84 13.39 4.06

Exhibit 5 Mexico 1994

1989 1990 1991 1992 1993 1994

Credit Creation (%) 45.6 41.7 35.6 21.4 11.5 29.2

Money Market Rate 10.8 9.47 9.72 13.62 14.64 11.77

* Includes errors and omissions

(year -5 = 100) 100.0 185.6 248.6 312.7 357.3 340.3

Inflation >100 >100 >100 24.6 10.6 4.3

* Includes errors and omissions

Lending Rate 23.1 19.5 14.7 15.1 14.7 14.9

Adapted from: 1997 International Financial Statistics Yearbook, IMF.

* Includes errors and omissions

Lending Rate 10.0 10.0 8.6 8.5 9.0 8.8

Adapted from: International Financial Statistics, November 1998, IMF.

* Includes errors and omissions

Deposit Rate 53.5 37.8 34.0 33.4 26.8 20.0

Adapted from: International Financial Statistics Yearbook, 1998. IMF.

* Includes errors and omissions

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