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Supply Shocks and Currency Crises: The Policy Dilemma Reconsidered

Marcus Miller, Javier García-Fronti and Lei Zhang

CSGR Working Paper 213/06


October 2006




The stylised facts of currency crises in emerging markets include output contraction coming hard on the heels of devaluation, with a prominent role for the adverse balance-sheet effects of liability dollarisation. In the light of the South East Asian experience, we propose an eclectic blend of the supply-side account of Aghion, Bacchetta and Banerjee (2000) with a demand recession triggered by balance sheet effects (Krugman, 1999). This sharpens the dilemma facing the monetary authorities - how to defend the currency without depressing the economy. But, with credible commitment or complementary policy actions, excessive output losses can, in principle, be avoided.




Supply and demand shocks, financial crises, contractionary devaluation, Keynesian recession.



Contact Details:


Centre for the Study of Globalisation and Regionalisation

The University of Warwick

Coventry CV4 7AL

United Kingdom