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Financial Crises in Emerging Markets: The Lessons from 1995

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Author Info
Jeffrey Sachs
Aaron Tornell
Andres Velasco

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5576.

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Date of creation: May 1996
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Handle: RePEc:nbr:nberwo:5576

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References listed on IDEAS
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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.
    Other versions:
  2. 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.). [Downloadable!]
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  3. Jeffrey A. Frankel, 1994. "Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?," IMF Working Papers 94/159, International Monetary Fund.
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  4. Mohsin S. Khan & Carmen Reinhart, 1995. "Capital Flows in the APEC Region," IMF Occasional Papers 122, International Monetary Fund.
    Other versions:
  5. Michael Gavin & Ricardo Hausmann & Leonardo Leiderman, 1995. "Macroeconomics of Capital Flows to Latin America: Experience and Policy Issues," RES Working Papers 4012, Inter-American Development Bank, Research Department. [Downloadable!]
  6. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," RES Working Papers 4026, Inter-American Development Bank, Research Department. [Downloadable!]
  7. Adam Bennett & María Vicenta Carkovic S. & Susan Schadler & Robert Brandon Kahn, 1993. "Recent Experiences with Surges in Capital Inflows," IMF Occasional Papers 108, International Monetary Fund.
  8. 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.
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  9. 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. [Downloadable!] (restricted)
  10. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. 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. [Downloadable!]
  12. 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. [Downloadable!]
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  13. Guillermo Calvo & Carmen Reinhart & Leonardo Leiderman, 1993. "The Capital Inflows Problem: Concepts and Issues," IMF Policy Discussion Papers 93/10, International Monetary Fund.
    Other versions:
  14. Calvo, Guillermo A & Leiderman, Leonardo, 1993. "The Capital Inflows Problem: Concepts and Issues," IMF Papers on Policy Analysis and Assessments 93/10, International Monetary Fund.
  15. repec:fth:inadeb:310 is not listed on IDEAS
  16. Guillermo A. Calvo, 1996. "Capital flows and macroeconomic management: tequila lessons," Working Papers in Applied Economic Theory 96-02, Federal Reserve Bank of San Francisco.
  17. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  18. 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(1995-2), pages 219-294. [Downloadable!]
  19. 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. [Downloadable!]
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