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A currency crisis results from chronic balance of payments deficits, and thus is also called a balance of payments crisis. Often such a crisis culminates in a devaluation of the currency. Financial institutions and the government will struggle to meet debt obligations and economic crisis may ensue. Causation also runs the other way.
Furthermore, the US had to run a balance of payments current account surplus to maintain confidence in the US dollar. As a result, the United States was faced with a dilemma because it is not possible to run a balance of payments current account deficit and surplus at the same time.
Country foreign exchange reserves minus external debt. In international economics, the balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the rest of the world.
In macroeconomics, sterilization is action taken by a country's central bank to counter the effects on the money supply caused by a balance of payments surplus or deficit. [1] This can involve open market operations undertaken by the central bank whose aim is to neutralize the impact of associated foreign exchange operations . [ 2 ]
A currency crisis, on the other hand, does not help to predict the beginning of a banking crisis, but does help to predict the peak of a banking crisis. That is, although it doesn't cause the beginning of a banking crisis, a Balance-of-Payment crisis may help to deepen an existing banking crisis, creating thus a "vicious cycle".
If the central bank were to conduct open market operations in the domestic bond market in order to offset these balance-of-payments-induced changes in the money supply — a process called sterilization – it would absorb newly arrived money by decreasing its holdings of domestic bonds (or the opposite if money were flowing out of the country ...
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