Prior to the 1990 currency crisis theoretical and empirical studies concentrated on establishing the causes of currency crises. Models developed then focused mainly on finding out a fixed exchange rate policy combined with excessively expansionary pre-crisis fundamentals push the economy into crisis with the private sector trying to profit from inconsistent policies. The 1990 currency crises on government controlled exchange rate in Europe and Mexico led to the development of new models called the second generation models on which a crisis occurs when the economy suddenly jumps from one solution to the other resulting in multiple equilibria. In these models the main cause of this multiplicity is the interaction between the private sector and government behaviour. There is no policy inconsistency before the crisis but the crisis itself induces a policy change that make the crises self- fulfilling. Policy- makers and academics have therefore focused their attention on policy discussions that involve identifying indicators of currency crisis. The process involves setting up early warning systems by monitoring the behaviour of certain key indicators.

Bibliography: leaves [73-77]