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Subject 8. Currency Crises PDF Download
The following stylized facts were found by an IMF study:

  • In the period leading up to a crisis, the real exchange rate is substantially higher than its mean level during tranquil periods.
  • The trade balance does not signal impending currency crisis.
  • Foreign exchange reserves tend to decline precipitously as the crisis approaches.
  • On average, the terms of trade deteriorate somewhat leading up to a crisis.
  • Inflation tends to be significantly higher in pre-crisis periods.
  • The ratio of M2 to bank reserves tend to rise in the 24-month period leading up to a crisis, then plummets sharply in the months immediately following a crisis.
  • Broad money growth in nominal and real terms tends to rise sharply in the two years leading up to a currency crisis, peaking around 18 months before a crisis hit.
  • Nominal private credit growth tends to rise sharply in the period leading up to a crisis.
  • Currency crises are often preceded by a boom-bust cycle in financial asset prices.
  • Real economic activity does not display any distinctive pattern ahead of a crisis but falls sharply in the aftermath of a crisis.

Learning Outcome Statements

describe warning signs of a currency crisis.

CFA® 2023 Level II Curriculum, Volume 1, Module 8

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