Exchange rate crises, in the absence of sustained monetary-financed fiscal deficits, can be explained with the neoclassical model. The characteristics of a crisis depend on the source of the shock and the government's response to it. Careful attention to intertemporal budget constraints...

Whenever unsustainable current government budget deficits predict future changes in monetary growth through the government's intertemporal budget constraint, fiscal variables become important exchange rate determinants. Failure to understand sustained rates of depreciation, seemingly unjustified...