In addition to these results, this paper provides some policy implications for avoiding a future currency crisis. The implications are taken from both generation models: (1) the need of maintaining stable economic fundamentals (especially, current account balance and enough accumulation of usable foreign reserves) along with a more flexible exchange rate system; (2) the need of a stable financial system by controlling capital flows and thus by avoiding a moral hazard problem.

In this regard, this paper attempts to examine the main causes of the Korean currency crisis by introducing the features stressed in both generation models. For this purpose, this paper develops a theoretical framework, which is based on the modified monetary model of exchange rate determination (or modified first generation models).

The principal research findings show that the collapse probability of the Korean exchange rate regime might have been lowered by decreasing the external credit shocks, the magnitude of sterilization, and the variability of relative price shocks. The impact of the uncertainty surrounding domestic credit growth on the probabilities of regime collapse varies during the sample period.

Two generations of currency crisis models coexist since the crises that occurred in some member countries of European Monetary System (EMS), and Mexico during the 1970s--1990s.

The first group of models regard inconsistency between macroeconomic fundamentals and the existing fixed exchange rate regime as the root of the crisis. More recent theoretical researches, which are so-called second generation models of speculative attacks, put more weight on the speculation itself, than on the bad economic fundamentals, in examining the driving force of collapse of a fixed exchange rate regime. However, the Korean crisis seems to have both characteristics of first and second generation models; a mixture of weak fundamentals (stressed in the first view), and factors leading to a self-fulfilling attack such as financial panic and contagion effects (emphasized in the second view).