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Currency Crashes in Industrial Countries: What Determines Good and Bad Outcomes?


  • *This paper was written primarily while I was working at the Federal Reserve Board. I owe a tremendous debt of gratitude to Hilary Croke and Steve Kamin, who worked with me on a previous attempt to get at the issues covered by this paper and who provided helpful comments and advice. I also thank Hilary for putting together the initial data set and chart package and for collecting the IMF documents. Thanks are due to two referees for helpful comments. The views expressed here are my own and should not be interpreted as reflecting the views of the Peterson Institute, the Federal Reserve Board or anyone else associated with the Federal Reserve System.

Joseph E. Gagnon
Senior Fellow
Peterson Institute for International Economics
1750 Massachusetts Avenue NW
Washington, DC 20036


Sharp exchange rate depreciations, or currency crashes, are associated with poor economic outcomes in industrial countries only when they are caused by inflationary macroeconomic policies. Moreover, the poor outcomes are attributable to inflationary policies in general and not the currency crashes in particular. On the other hand, crashes caused by rising unemployment or external deficits have always been followed by solid economic growth, rising asset prices and stable or falling inflation rates.