What is a currency crisis?

The

currency crisis occurs when one region's money becomes rapidly compared to the international system. The term monetary crisis is most often used in discussion on the economy from the perspective of foreign investors. The monetary crisis is also sometimes called the Crisis of Payment Balance because it often depends on. The payment balance concerns the difference between the entry of money and the money leaving the country. If the payment balance becomes a differentiated and the country has to pay more money than it has taken, it will lose foreign investment.

A sudden decrease in the currency value associated with the currency crisis occurs when the government artificially connects the value of its currency to another. Usually, in order for this value to be maintained for its currency, it must have and occasionally use their foreign reserves - ie offering a foreign currency - to buy one of its own currency. This procedure allows the government to minimize inflation on the domestic market and maintain the same exchange rate at the international level.

When investors lose confidence in the currency, they will exchange it for other assets. CurrencyIt will return to the country's home economy and the government will be forced to use more and more of its foreign reserves to buy their own currency and prevent it from circulation. Foreign reserves are rapidly spent during monetary crisis. When they are exhausted, the results of the economic crisis.

At some point of the process, the government will have to adjust the exchange rate for its currency or let its currency "swim" or freely trade. Expectations even intensify the ongoing economic crisis, because foreign investors will be particularly eager to sell a currency directed towards devaluation. However, the transition to a floating exchange rate can, in the long run, help the economy by reducing the probability of the next sudden crisis.

Wisely quoted example of the monetary crisis is the Mexican peso crisis in 1994. Mexico had a firm exchange rate that attached the value of the peso to the US dollar. A number of political and economic domestic problems caused an investoThey sold their pesos, which amazed the ability of the Mexican government to maintain their exchange rate using foreign reserves. The government was forced to separate the value of peso from the dollar, causing a rapid decrease in its value. The US was able to soften the wound of inflation by purchasing some excess pesos.