| In the first essay, I introduce a theoretical model of the ERM (Exchange Rate Mechanism) crisis of 1992–93. The model has three important features. First, it allows a role for both fundamentals and non-fundamentals in the currency crisis. Second, with a three-country framework (one large and two small countries), the model explains the mechanisms of contagion in the ERM crisis. Finally, the model assigns a central role to both the government and speculators. It suggests that bad fundamentals and contagion explain the ERM crisis. The currency with the weakest fundamentals is attacked first and devalued. Then, the other currencies that would otherwise have been sustainable are attacked and forced to devalue.; The second essay investigates output recovery from 134 episodes of currency crisis in 78 developing countries between 1975 and 1996. I examine which variables help to explain output recovery after such crises. The measure of output recovery is the real GDP growth rate as a deviation from its trend (sample mean) in the year following a currency crisis. A fixed effects panel regression model is estimated. The regression results indicate that investment, inflation, and short-term foreign debt before the crisis have negative effects on output recovery. Among the post-crisis variables, real money growth, real exchange depreciation, and exports contribute to fast recovery, but banking crisis and political instability have negative impacts on output recovery.; The third essay investigates whether the countries in the EMU (Economic and Monetary Union) might observe greater volatility in real output based on their experience in the recent period. The first finding is that regional specialization in EU (European Union) has not increased in the recent period and EU countries are already at least as specialized as US regions. Second, although the lack of correlation in macroeconomic shocks persists, the size of shocks has decreased in the recent period. Finally, real wage flexibility improved during the 1980s and 1990s. These findings indicate that output volatility in the EMU may not be as high as some economists have suggested. |
