Political factors can also cause currency crises. Developing countries have historically
been more prone to currency crises than developed countries because they
tend to have a weaker rule of law, governments more prone to being overthrown
by force, central banks that are not politically independent, and other characteristics
that create political uncertainty about monetary policy.
External factors can be another source for a currency crisis. For example, an
increase in interest rates in major international currencies can trigger a currency crisis
if a central bank resists increasing the interest rate it charges. Funds may flow out
of the local currency into foreign currency, decreasing the central bank’s reserves to
unacceptably low levels and therefore putting pressure on the government to devalue
its currency if the currency is pegged. Moreover, a big external shock that disrupts
the economy, such as war or a spike in the price of imported oil, can likewise trigger
a currency crisis. External shocks have been key features in many currency crises
historically.