Chapter 9: Exchange Rate Crises: How Pegs Work and How They Break Flashcards
Exchange Rate Crisis
A big depreciation
Banking Crisis
A crisis of the private sector
If banks and other financial institutions face adverse shocks, they may become insolvent, causing them to close or declare bankruptcy
Default Crisis
A crisis of the public sector
If the government faces adverse shocks, it may default and be unable or unwilling to pay the principal or interest on its debts
Twin Crises
When two out of the three crises (exchange rate crisis, banking crisis, and default crisis) occur together.
Triple Crises
When a banking crisis, a default crisis, and an exchange rate crisis all occur together
Domestic Credit
Central bank purchases
Reserves
Foreign assets
Central Bank Balance Sheet
The balance sheet for the central bank’s assets and liabilities
Assets
What is owed to you
Liabilities
What you owe
Floating Line
Cases in which the central bank balance sheet contains no reserves. It is called so because we assume that they have a floating exchange rate (45 degree line)
Fixed Line
A vertical line on the graph. It is so because the money supply is at the level necessary to maintain the peg
Currency Board
A fixed exchange rate that always operates with reserves equal to 100% of the money supply
Country Premium
Compensation for perceived default risk
Sterilization
Refers to the actions taken by a country’s central bank to counter the effects on the money supply caused by a balance of payments surplus or deficit