ABSTRACT
Recent studies on the Asian 1997…98“nancial crisis such as the work by Krugman (2000), Mishkin (1998), Miller and Stiglitz (1999), Flaschel and Semmler (2003) and the previous chapter have elaborated on the mechanisms of how a currency crisis can trigger a “nancial crisis that may lead to a severe economic slowdown. Some authors have claimed that currency hedging could have prevented currency and “nancial crises. We will also investigate this line of research. Yet, in most recent work on this issue the wage and price levels are usually “xed. Another contribution of this chapter to the currency crisis literature is thus to introduce a currency crisis model with ”exible domestic wages and prices in order to model how not only nominal but also (through domestic price level changes) real exchange rate ”uctuations affect the dynamics of the macroeconomic activity. In our opinion wage and price dynamics are the missing link to explain what happens in the medium run in a country that has experienced …through a currency and “nancial crisis …a severe slowdown in its economic activity.
