Question

Currency crises in the United Kingdom and Hong Kong .

please give Suggestion and alternative while you are focusing on UK currency devaluation in the case given.  

Answer 1

There were currency crises that took place in the United Kingdom in 1992 and Hong Kong in 1998. There are various alternatives which can be applied to eradicate the currency crisis in the initial stage. In the case of the above countries, they have followed a rigid or fixed exchange rate system which led to the problem of the currency crisis and had badly affected their economy. Moving from a fixed exchange rate system to a floating exchange system can figure out the problem of the currency crisis in the initial stage where the market has adequate freedom to fix the price rather than arbitrarily fixed by the Central banks(in Fixed Exchange Rate system). For example, the Government of India has adopted a managed floating exchange system which is a hybrid exchange rate system in which the central bank too intervene in the fixation of the exchange rate in certain situations. This has been adopted in India since the mid of 1992

Avoidance of inadequate monetary policies is another way of preventing the occurrence of a financial crisis for a country. If the concerned authorities fail to make adequate policies, which will end up in financial crisis. So keep in mind the proverb "Prevention is better than cure".

The various solutions to the problem of money crisis other than devaluation are:

1)Deliberately  inflating the economy

Here the central bank tries to inflate the economy to increase the demand to achieve economic growth in a recession affected economy. This can be done making appropriate monetary and fiscal policies (reducing the tax, increasing public expenditure)which will increase the aggregate demand in the economy.

2)Stop paying the debts partly or fully

Here it is better for the government to stop repaying the debts or defaulting the interest payments to revive the economy. This may categorize the economy as a defaulting economy but it is far better than aggressively cutting the public spending.

3)Tightening the monetary policy and fiscal policy will be useful in cases of severe inflation

Personally, I believe that the UK could have adopted any of the above measures or a mix of it with respect to the underlying nature of the currency crisis.