Over 28 years, four international financial crises occurred: the Latin American, the Japanese, the East Asian, and the Global Financial Crisis. With a crisis occurring every seven years on average, the international financial system grew historically fragile. These four crises reveal the dangers of global capital flows in a floating exchange rate system. In every crisis, capital imports poured into a country experiencing financial innovation, increasing asset values and credit availability. Meanwhile, appreciating currencies improved investors’ returns, and their risk preferences increased. As investors’ financial and economic outlook grew unrealistically optimistic, increased leverage generated instability in the domestic financial and…...
A New Type of Financial Crisis–The Destabilizing Effects of Floating Exchange Rates
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