The theory of balance of payments crisis and the czech experience

This paper presents an analysis of the speculative attack on the pegged exchange rate of the CZK in the context of the classical theory of balance of payments crises. While provides a survey of the theoretical trends in the economic literature, the paper introduces a detail description of the first-generation model of the currency crises theory developed by Krugman, Flood and Garber. In the empirical section, using the index of exchange market pressure, the author identifies the Czech currency crisis as a relatively mild. The article then discusses behaviour of a variety macroeconomic and structural indicators before and after the speculative attack on the CZK in May of 1997. The author finds that the development of the economic fundamentals (the domestic credit, the net foreign assets, the real exchange rate or the current account balance) was consistent with conclusions of the first-generation models of the currency crisis theory.

Keywords: speculative attack, currency crisis, balance of payments crisis, CZK