In this class we have studied different kinds of financial crises.
a. First and second generation crises attempt to explain the determinants of currency crises. Explain what a currency crisis is, briefly. What is the key difference in the explanation of a currency crisis between the first and a second generation theories? Provide an historical example for a crisis that economists think exemplifies the second generation crisis theory. What is one policy that could have been taken to avoid the currency crash? Was this policy taken? Why not?
b. The third generation financial crisis theory incorporates yet more elements. Explain how a third generation currency crisis theory is different from a first generation crisis and a second generation crisis? How is it similar to a second generation crisis?
c. Explain carefully how a sudden stop in capital flows matters for investment and imports in an economy. Give two policies or actions a less developed economy could take to limit the damage from a sudden stops of capital inflows.
d. Some economists believe a big sudden stop of capital flows occurred in the early 1980s. In what context did this sudden stop occur? What do you think caused capital to stop flowing? What was the implication of the sudden stop for economic stability, growth and financial stability for the countries involved in this sudden stop?
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