How Does a Currency Collapse?
To keep the promise, the central bank must swap money at the fixed price whoever asks; Thailand tied the baht to a basket mostly of dollars until July 1997.
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1.What is a peg?
To keep the promise, the central bank must swap money at the fixed price whoever asks; Thailand tied the baht to a basket mostly of dollars until July 1997.
2.What are the three pillars that hold a fixed rate up?
Trust: people believe the central bank can keep the price; reserves: foreign money it can sell; inflows: foreign money coming in as loans and investment.
3.What is a currency mismatch?
Thai finance companies borrowed in dollars, partly short-term, and lent in baht for longer terms; harmless while the rate stays fixed.
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Sources (2)
- IMF (Boughton), Chapter 11 "Asian Flu: Financial Crisis in the Pacific", in: IMF History 2001-2005/2012 online
- Eigene Berechnung (Modelland, Python-Nachrechnung
Education only. Not financial advice.