A shortcoming of the international monetary system is that major currency crises
have been a common occurrence in recent years. A currency crisis, also called a
speculative attack, is a situation in which a weak currency experiences heavy selling
pressure. There are several possible indications of selling pressure. One is sizable
losses in the foreign reserves held by a country’s central bank. Another is depreciating
exchange rates in the forward market, where buyers and sellers promise to
exchange currency at some future date rather than immediately. Finally, in extreme
cases where inflation is running rampant, selling pressure consists of widespread
flight out of domestic currency into foreign currency or into goods that people
think will retain value, such as gold or real estate. Experience shows that currency
crises can decrease the growth of a country’s gross domestic product by six percent,
or more. That is like losing one or two years of economic growth in most countries.
Table 15.5 provides examples of currency crises.