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344 CHAPTER 11. BALANCE OF PAYMENTS CRISESBalance of Payments Crises Summary1. A Þxed exchange rate regime will eventually collapse. The resultis typically a balance of payments or currency crisis characterizedby substantial Þnancial market volatility and large losses offoreign exchange reserves by the central bank.2. Prior to the 1990s, crises were seen mainly to be the result ofbad macroeconomic management–policies choices that were inconsistentwith the long-run maintenance of the exchange rate.First-generation models focused on predicting when a crisismight occur. These models suggest that macroeconomic fundamentalssuch as the budget deÞcit, the current account deÞcitand external debt relative to the stock of international reservesshould have predictive content for future crises.3. Second-generation models are models of self-fulÞlling criseswhich endogenize government policy making and emphasize theinteraction between the authorities’s decisions and the public’sexpectations. Sudden shifts in market sentiment can weaken thegovernment’s willingness to maintain the exchange rate whichthereby triggers a crisis.