Fiscal policy plays a big role incurrency crises - before, and after they occur. Thuspolicymakers should not underestimate the importance offiscal policy: a) the realization of large contingentliabilities can quickly, and dramatically alter governmentfinances, leading to a currency crisis; b) the effects of acurrency crisis on government finances depend on thestructure of government revenue, spending, and debt; c) thefiscal policies adopted in response to a crisis, influenceeconomic outcomes, especially inflation, and depreciation.The note reviews the traditional models of currency crises,explained as a consequence of unsustainable fiscal policy,and how debt is accumulated, how currency crisis thendevelops, and why does fiscal policy matter. Focusing onbank bailouts, it is argued that traditional models ofcurrency crises are applicable to emerging markets,suggesting that deficits after the East Asia financialcrises could have been anticipated given the region'sdeteriorating banking systems, but that economic outcomeslargely depend on the mix of financing.
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