Financial Instability

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of whether regulation causes or mitigates
financial instability is raised by the third interpretation; while the fourth
view deals with the “trigger point” phenomena.
To fully comprehend these interpretations we must first understand and
differentiate between a “currency” and “contagion” crisis. A currency crisis
refers to a situation is which a loss of confidence in a country's currency
provokes capital flight. Conversely, a contagion crisis refers to a loss of
confidence in the assets denominated in a particular currency and the subsequent
global transmission of this shock.
One of the more paramount readings of financial instability pertains to
speculation. Speculation is exhibited in a situation where a government
monetary or fiscal policy (or action) leads investors to believe that the
currency of that particular nation will either appreciate or depreciate in terms
relative to those of other countries. Closely associated with these speculative
attacks is what is ...

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to explain
financial instability. Similar to the speculative cycles described above, this
refers to a situation where a group of investors commits to buy or sell a
currency when that currency reaches a certain price level. If that particular
currency were to rise or fall to that specified level, whether by real or
speculative reasons, the precommited investors buy or sell that currency or
assets. This results in a cascade effect that, like speculative cycles,
increases or decreases the value of the currency to remarkably higher or lower
levels.
Country after country has deregulated its financial markets and
institutions. The neoclassical interpretation asserts that regulation ...

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