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External Vulnerability in Emerging Market Economies

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Author Info

  • Christian B. Mulder
  • Matthieu Bussière

Abstract

This paper investigates the factors behind the 1994 and 1997 crises and whether these can explain the 1998 crisis. The study reveals that: (i) variables used in an Early Warning System model developed by IMF staff scored well in predicting the 1998 crisis out-of-sample; (ii) all three crisis episodes can be well explained by a parsimonious set of core fundamentals and liquidity related variables; and (iii) the presence of an IMF-supported program significantly reduced the depth of crises. The results suggest that as a rule of thumb countries should hold reserves to the tune of short-term debt to avoid contagion-related crises, provided their current deficits are modest and their real effective exchange rates are not significantly misaligned.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 99/88.

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Length: 41
Date of creation: 01 Jul 1999
Date of revision:
Handle: RePEc:imf:imfwpa:99/88

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  1. Catherine A. Pattillo & Andrew Berg, 1998. "Are Currency Crises Predictable? a Test," IMF Working Papers 98/154, International Monetary Fund.
  2. Christian B. Mulder & Matthieu Bussière, 1999. "Political Instability and Economic Vulnerability," IMF Working Papers 99/46, International Monetary Fund.
  3. Guillermo A. Calvo, 1996. "Capital flows and macroeconomic management: tequila lessons," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 96-02, Federal Reserve Bank of San Francisco.
  4. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 13(4), pages 85-104, Fall.
  5. Catherine A. Pattillo & Andrew Berg & Gian-Maria Milesi-Ferretti & Eduardo Borensztein, 2000. "Anticipating Balance of Payments Crises," IMF Occasional Papers 186, International Monetary Fund.
  6. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 534, Board of Governors of the Federal Reserve System (U.S.).
  7. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
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