Financial Crisis - First Second Third Generation Models of Currency Crisis (Essay Sample)

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Financial Crisis-First Second Third Generation Models of Currency Crisis
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Abstract
Over the years, the world has been faced by a number of problems ranging from economic meltdowns to currency crises. For instance, the post war periods have been faced with a lot of these due to a number of economic downplays which have been faced as a result of population explosion and other political factors. The year of 2008 saw very many nations struggling with the greatest economic downplay of all time, which was able to affect the greatest majority of nations across the world. As well, the issue of currency crises also came calling in the countries hence leading to the development of models aimed in explaining much about the currency crises. This paper therefore is a discussion on the strengths and weaknesses of the second and third generation currency crisis models. There is also a better explanation of the model which defines much of the 2008 crisis.

Financial Crisis-First Second Third Generation Models of Currency Crisis
After the world war periods, the world was faced by a very fatal financial crisis. Basically, the currency crisis which has been faced presently is an episode which sees the global exchange rates depreciating substantially within the shortest time possible. Different models have thus been brought forth which have the ability of explaining the occurrence of the crisis and how it can be solved (David & Scott, 2008). These models have been in great semblance with the first generations form of models which were postulated by Garber and Flood in the early 1980s. The second generation forms of models have been seen to exhibit a number of multiple equilibria which come up with speculative kinds of attacks which might reduce the expectations and similar incidences.
Towards addressing the problem faced, the banks do minimize all the quadratic losses depending on the rates of inflation. In this kind of model as stipulated by Obstfeld, the level within the country’s output shall be determined by the government in which it shall determine the rates of exchange to be plastic or fixed. The government through the central bank does validate the currency flows, something which is unexpectedly done through valuation and devaluation mechanisms (David & Scott, 2008). The most unique aspect with this model is that it does assume much on the fundamentals of common knowledge. With the above strengths with the second generation models, it has also been necessary to note that the model does not give substantial definition and explanation on how the crises do come along while embarking much on the solutions which can be adopted to the crises (Krugman, 2009). As well, the models do not come into terms with the changing economic imbalances which have been faced currently and how the crises can be addressed during the time of economic crisis like the one of the 2008. Also, the central banks have been seen to have the only role which can alleviate the problem, something which is not always true. In that case, the development of the third generation models on currency crises was explained and being able to address the major weaknesses which were seen with the first and second generation models (Frenkel & Karmann, 2009).
However, since most of the global currencies have been known to have crisis which have been coinciding with the financial sector, there was the need or motivation of propagating these effects through coming up with better models which would be known as the third generation models on currency crises. Such models were able to effectively emphasize on the effects which come as a result of the balance sheet. Basically, these models have been able to come up with appropriate strategies through which the exposures on the balance sheet might lead to a currency and banking crisis (Shimpalee, 2009). The models have as well been noted to come up with arguments that the main approach in...