Currency Crises and External Financial Fragility

This paper has two main objectives. The first is to develop an interpretation based on Minskys financial fragility hypothesis of the process that generates currency crises and their determinants. To this end, the authors ideas are adapted to an open economy. It is proposed that the deterioration of an economys external financial structure is the factor responsible for increasing its degree of external fragility and its susceptibility to currency crises. Based on this interpretation, external fragility indicators are constructed to measure an economys propensity to suffer a currency crisis. The second objective of this study is to evaluate the evolution of the Brazilian economys external fragility between 1999 and 2013. This task is carried out by applying the indicators and interpretation developed in the first part of the paper to that country. The results suggest that Brazils external fragility underwent a gradual and significant reduction during the period studied.