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What Caused the 1991 Currency Crisis in
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@MISC{Cerra_whatcaused,
author = {Valerie Cerra and Sweta Chaman Saxena and Valerie Cerra and Sweta Chaman Saxena},
title = {What Caused the 1991 Currency Crisis in},
year = {}
}
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Abstract
contribute to the crisis? This paper seeks the answers through error correction models and by constructing the equilibrium real exchange rate using a technique developed by Gonzalo and Granger (1995). The evidence indicates that overvaluation as well as current account deficits and investor confidence played significant roles in the sharp exchange rate depreciation. The ECM model is supported by superior out-of-sample forecast performance versus a random walk model. [JEL F31, F32, F47] In mid-1991, India’s exchange rate was subjected to a severe adjustment. This event began with a slide in the value of the rupee leading up to mid-1991. The authorities at the Reserve Bank of India slowed the decline in value by expending international reserves. With reserves nearly depleted, however, the exchange rate was devalued sharply on July 1 and July 3 against major foreign currencies. India’s 1991 crisis provides an interesting case study with certain features that are distinct from popular theoretical models. Although some elements were present, the crisis cannot adequately be described as a first generation currency crisis model. It also didn’t follow the second generation models, nor the more recent literature that emphasizes financial sector weakness, overlending cycles, and contagion. In addition, despite progress in liberalizing trade and capital flows, India is still relatively closed and capital inflows have been well below those in *Valerie Cerra is an Economist in the European I Department of the IMF. Sweta Chaman Saxena is an Assistant Professor at the University of Pittsburgh. We would like to thank Timothy Callen, Charles Engel, Robert Flood, David Goldsbrough, and Christopher Towe for helpful comments on this and earlier versions of this paper, and Janet Bungay for editorial suggestions.
Keyphrases
currency crisis exchange rate janet bungay second generation model financial sector weakness timothy callen crisis cannot international reserve certain feature recent literature charles engel valerie cerra ecm model major foreign currency error correction model sharp exchange rate depreciation significant role capital inflow interesting case study sweta chaman saxena random walk model investor confidence assistant professor severe adjustment current account deficit helpful comment first generation currency crisis model robert flood david goldsbrough superior out-of-sample forecast performance reserve bank equilibrium real exchange rate capital flow jel f31 editorial suggestion christopher towe popular theoretical model
