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Financial Crises in Emerging Markets: The Lessons from 1995

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  • Jeffrey Sachs
  • Aaron Tornell
  • Andres Velasco

Abstract

In this paper we examine closely the financial events following the Mexican peso devaluation to uncover new lessons about the nature of financial crises. We explore the question of why, during 1995, some emerging markets were hit by financial crises while others were not. To this end, we ask whether there are some fundamentals that help explain the variation in financial crises across countries or whether the variation just reflects contagion. We present a simple model identifying three factors that determine whether a country is more vulnerable to suffer a financial crisis: a high real exchange rate appreciation, a recent lending boom, and low reserves. We find that for a set of 20 emerging markets, differences in these fundamentals go far in explaining why during 1995 some emerging markets were hit by financial crises while others were not. We also find that alternative hypotheses that have been put forth to explain such crises often do not seem to be supported by the data, such as high current account deficits, excessive capital inflows and loose fiscal policies.

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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1759.

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Date of creation: 1996
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Handle: RePEc:fth:harver:1759

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References

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  1. Classens, S. & Dooley, M.P. & Warner, A., 1995. "Portfolio Capital Flows: Hot or Cold," Papers 501, Harvard - Institute for International Development.
  2. Michael Gavin & Ricardo Hausmann & Leonardo Leiderman, 1995. "Macroeconomics of Capital Flows to Latin America: Experience and Policy Issues," Research Department Publications 4012, Inter-American Development Bank, Research Department.
  3. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
  4. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," Research Department Publications 4026, Inter-American Development Bank, Research Department.
  5. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994. "The capital inflows problem: Concepts and issues," MPRA Paper 13902, University Library of Munich, Germany.
  6. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1995. "Speculative attacks on pegged exchange rates: an empirical exploration with special reference to the European Monetary System," Working Papers in Applied Economic Theory 95-04, Federal Reserve Bank of San Francisco.
  7. Calvo, Guillermo A. & Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Targeting the real exchange rate: theory and evidence," Journal of Development Economics, Elsevier, vol. 47(1), pages 97-133, June.
  8. Calvo, Guillermo A, 1996. "Capital Flows and Macroeconomic Management: Tequila Lessons," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 207-23, July.
  9. Hernandez, Leonardo & Rudolph, Heinz, 1995. "Sustainability of private capital flows to developing countries : Is a generalized reversal likely?," Policy Research Working Paper Series 1518, The World Bank.
  10. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  11. repec:imf:imfpdp:93/10 is not listed on IDEAS
  12. Manuel Agosin & Ricardo French-Davis, 1997. "Managing capital inflows in Chile," Estudios de Economia, University of Chile, Department of Economics, vol. 24(2 Year 19), pages 297-326, December.
  13. Jeffrey A. Frankel., 1993. "Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?," Center for International and Development Economics Research (CIDER) Working Papers C93-024, University of California at Berkeley.
  14. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  15. Carmen Reinhart & Mohsin S. Khan, 1995. "Capital Flows in the APEC Region," IMF Occasional Papers 122, International Monetary Fund.
  16. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
  17. Carmen M. Reinhart & Sara Calvo, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?," Peterson Institute Press: Chapters, in: Guillermo A. Calvo & Morris Goldstein & Eduard Hochreiter (ed.), Private Capital Flows to Emerging Markets After the Mexican Crisis, pages 151-171 Peterson Institute for International Economics.
  18. Robert Brandon Kahn & Adam Bennett & María Vicenta Carkovic S. & Susan Schadler, 1993. "Recent Experiences with Surges in Capital Inflows," IMF Occasional Papers 108, International Monetary Fund.
  19. Mark M. Spiegel, 1995. "Sterilization of capital inflows through the banking sector: evidence from Asia," Economic Review, Federal Reserve Bank of San Francisco, pages 17-34.
  20. repec:fth:inadeb:310 is not listed on IDEAS
  21. Rudger Dornbusch & Ilan Goldfajn & Rodrigo O. Valdés, 1995. "Currency Crises and Collapses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 219-294.
  22. repec:imf:imfpdp:9310 is not listed on IDEAS
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