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A Balance Sheet Approach to Financial Crisis

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Author Info

  • Brad Setser
  • Nouriel Roubini
  • Christian Keller
  • Mark Allen
  • Christoph B. Rosenberg
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    Abstract

    The paper lays out an analytical framework for understanding crises in emerging markets based on examination of stock variables in the aggregate balance sheet of a country and the balance sheets of its main sectors (assets and liabilities). It focuses on the risks created by maturity, currency, and capital structure mismatches. This framework draws attention to the vulnerabilities created by debts among residents, particularly those denominated in foreign currency, and it helps to explain how problems in one sector can spill over into other sectors, eventually triggering an external balance of payments crisis. The paper also discusses the potential of macroeconomic policies and official intervention to mitigate the cost of such a crisis.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=16167
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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/210.

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    Length: 63
    Date of creation: 01 Dec 2002
    Date of revision:
    Handle: RePEc:imf:imfwpa:02/210

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    Related research

    Keywords: Emerging markets; exchange rate; currency risk; foreign exchange; external debt; balance of payments; hard currency; currency mismatches; domestic currency; current account; currency mismatch; external financing; debt restructuring; currency debt; central bank; short-term debt; balance sheet effects; currency crises; currency debts; exchange rate regime; debt management; real exchange rate; government debt; foreign currency debt; public debt; external borrowing; external liabilities; reserve assets; debt stock; currency crisis; nominal exchange rate; exchange rate adjustment; external debt statistics; debt service; exchange rate regimes; foreign currency debts; debt dynamics; exchange rates; crisis countries; currency composition; debt statistics; external shocks; external debts; fixed exchange rate; domestic debt; public debt management; exchange rate overshooting; exchange rate peg; net external debt; long-term debt; exchange rate policy; flexible exchange rate; sovereign debt; current account deficit; currency depreciation; floating exchange rate regime; floating exchange rate; fixed exchange rate regime; debt sustainability; flexible exchange rate regimes; liquid foreign currency; exchange reserves; foreign exchange reserves; debt data; official creditors; debt stocks; external debt service; external debt data; fixed exchange rates; nominal exchange rate stability; current account deficits; debt crisis; debt reduction; currency board; short-term debts; overvalued exchange rate; current account balance; exchange rate stability; debt service payment; public sector debt; debt burden; currency risks; central banks; total external debt; domestic debts; liquid reserves; exchange rate movements; exchange rate mechanism; exchange rate shock; domestic debt stock; real exchange rates; liquid reserve; government debts; private sector assets; private debt; domestic savings; unstable debt dynamics; substantial debt; inflexible exchange rate; current account surplus; exchange rate misalignments; external liability; exchange controls; private sector creditors; sovereign borrowers; liquidity crises; debt servicing; private debts; international lending; domestic investors; private debtors; inflexible exchange rate regime; external finance; foreign exchange market; private external debt; real exchange rate movements; external debt stock; sovereign debt restructuring; exchange rate depreciations; domestic absorption; private creditors; sovereign debt crisis; balance of payment; debt problems; private banks; exchange rate exposure; external debt position; real exchange rate misalignments; current account adjustment; public debt management guidelines; domestic financing; private financial institutions; liquidity ? crisis; current account surpluses; debt structures; domestic financial markets;

    References

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    1. Enrique G. Mendoza, 2001. "Credit, Prices, and Crashes: Business Cycles with a Sudden Stop," NBER Working Papers 8338, National Bureau of Economic Research, Inc.
    2. International Monetary Fund, 2002. "Financial Soundness Indicators," IMF Occasional Papers 212, International Monetary Fund.
    3. Agénor,Pierre-Richard & Miller,Marcus & Vines,David & Weber,Axel (ed.), 1999. "The Asian Financial Crisis," Cambridge Books, Cambridge University Press, number 9780521770804, October.
    4. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November.
    5. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
    6. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
    7. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    8. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1999. "Prospective deficits and the asian currency crisis," Policy Research Working Paper Series 2174, The World Bank.
    9. Nouriel Roubini & Michele Cavallo & Kate Kisselev, 2004. "Exchange rate overshooting and the costs of floating," Computing in Economics and Finance 2004 62, Society for Computational Economics.
    10. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
    11. Leslie Teo & Charles Enoch & Carl-Johan Lindgren & Tomás J. T. Baliño & Anne Marie Gulde & Marc Quintyn, 2000. "Financial Sector Crisis and Restructuring," IMF Occasional Papers 188, International Monetary Fund.
    12. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
    13. Manuel De la Rocha & Roberto Perrelli & Christian B. Mulder, 2002. "The Role of Corporate, Legal and Macroeconomic Balance Sheet Indicators in Crisis Detection and Prevention," IMF Working Papers 02/59, International Monetary Fund.
    14. Jeanne, Olivier & Wyplosz, Charles, 2001. "The International Lender of Last Resort: How Large is Large Enough?," CEPR Discussion Papers 2842, C.E.P.R. Discussion Papers.
    15. Paul Louis Ceriel Hilbers & Alfredo Mario Leone & Mahinder Singh Gill & Owen Evens, 2000. "Macroprudential Indicators of Financial System Soundness," IMF Occasional Papers 192, International Monetary Fund.
    16. Roberto Chang & Andres Velasco, 1999. "Liquidity crises in emerging markets: Theory and policy," Working Paper 99-15, Federal Reserve Bank of Atlanta.
    17. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    18. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, vol. 51(1), pages 79-113, June.
    19. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
    20. Michele Cavallo & Kate Kisselev & Fabrizio Perri & Nouriel Roubini, 2005. "Exchange rate overshooting and the costs of floating," Working Paper Series 2005-07, Federal Reserve Bank of San Francisco.
    21. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies," IMF Working Papers 99/88, International Monetary Fund.
    22. Martin Schneider & Aaron Tornell, 2000. "Balance SHeet Effects, Bailout Guarantees and Financial Crises," NBER Working Papers 8060, National Bureau of Economic Research, Inc.
    23. R. B. Johnston & Liliana Schumacher & Jingqing Chai, 2000. "Assessing Financial System Vulnerabilities," IMF Working Papers 00/76, International Monetary Fund.
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