Second generation models of currency crises

Until the beginning of the 1990s, currency crises were typically analyzed w ithin the framework of a generation of models that assumed that the foreign exchange reserves of a country that was running a fixed exchange rate poli cy were falling (because the government was running a deficit on its budget that was financed by printing money). When the foreign exchange reserves r eached a lower bound, a speculative attack on the fixed exchange rate was l aunched. Today, this theory is no longer the benchmark when explaining the occurrence of a currency crisis. Actually, a new generation of models that seeks to take explicitly into account the costs and benefits associated wit h the maintenance of a fixed exchange rate has emerged. This paper surveys these 'second generation models of currency crises'. This generation of mod els emphasizes that it is an endogenous decision if a government chooses to abandon a policy of fixed exchange rates. The survey pays special attentio n to the fact that the second generation of currency crises models often ge nerates multiple equilibria for the rate of devaluation given one state of the economic fundamentals. A currency crisis can thus occur even if no secu lar trend in economic fundamentals can be identified, as in recent currency crises.