Exchange rates during financial crises Homework Help

Exchange rates during financial crises
1
Exchange rate movements during the global financial crisis of 2007–09 were unusual.
Unlike in two previous episodes – the Asian crisis of 1997–98 and the crisis following
the Russian debt default in 1998 – in 2008 many countries that were not at the centre
of the crisis saw their currencies depreciate sharply. Such crisis-related movements
reversed strongly for a number of countries. Two factors are likely to have contributed
to these developments. First, during the latest crisis, safe haven effects went against
the typical pattern of crisis-related flows. Second, interest rate differentials explain
more of the crisis-related exchange rate movements in 2008–09 than in the past. This
probably reflects structural changes in the determinants of exchange rate dynamics
such as the increased roleof carry trade activity.

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