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Domestic Causes of Currency Crises: Policy Lessons for Crisis Avoidance

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  • Helmut Reisen

Abstract

The recent currency crises in Latin America and Asia have hit countries with strong macroeconomic fundamentals but weak domestic financial systems. Private capital flows, attracted by disorderly financial liberalisation and exchange rate pegs, reversed abruptly when financial-sector weaknesses became apparent. Often, domestic financial systems have proved too weak a conduit for heavy capital inflows, resulting in declining credit quality and financial vulnerability to speculative currency attacks. Developing countries are therefore advised to pay close attention to indicators of financial vulnerability, in particular to short-term debt levels as a fraction of official foreign exchange reserves, as well as to currency and maturity mismatches in private-sector balance sheets. This paper points to the avenues that can be pursued to avoid a rise in the vulnerability indicators above critical levels ... Some of these avenues are uncontroversial, but deceptively hard to implement. Good ... Les crises monétaires qui ont récemment frappé l’Asie et l’Amérique latine ont atteint des pays dotés de fondements macro-économiques solides, mais de systèmes financiers faibles. Les capitaux privés, attirés par une libéralisation financière sans contrainte et par les différentiels de taux de change, se sont retirés brusquement lorsque les faiblesses du secteur financier sont apparues au grand jour. Bien souvent, les systèmes financiers nationaux n’ont pas pu jouer correctement leur rôle d’intermédiation face à des entrées massives de capitaux. La qualité du crédit s’en est ressentie et les pays se sont trouvés vulnérables aux attaques spéculatives contre leur monnaie. Aussi faut-il conseiller aux pays en développement de surveiller étroitement les indicateurs de vulnérabilité financière, et notamment les niveaux d’endettement à court terme par rapport aux réserves officielles en devises, ainsi que les déséquilibres en devises au passif et à l’actif et les décalages des échéances ...

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Development Centre Working Papers with number 136.

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Date of creation: Jun 1998
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Handle: RePEc:oec:devaaa:136-en

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  1. Jeffrey D. Sachs & Aaron Tornell & Andrés Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 147-216.
  2. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  3. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  4. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
  5. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, Elsevier, vol. 45(1), pages 115-135, June.
  6. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, Elsevier, vol. 17(1-2), pages 1-13, August.
  7. Guillermo A. Calvo & Enrique G. Mendoza, 1996. "Mexico's balance-of-payments crisis: a chronicle of death foretold," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 545, Board of Governors of the Federal Reserve System (U.S.).
  8. Helmut Reisen, 1998. "Sustainable and Excessive Current Account Deficits," OECD Development Centre Working Papers 132, OECD Publishing.
  9. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," NBER Working Papers 5437, National Bureau of Economic Research, Inc.
  10. J. J. Polak, 1957. "Monetary Analysis of Income Formation and Payments Problems," IMF Staff Papers, Palgrave Macmillan, vol. 6(1), pages 1-50, November.
  11. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
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Citations

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Cited by:
  1. Lamberte, Mario B., 1999. "Currency Crisis: Where Do We Go From Here?," Discussion Papers, Philippine Institute for Development Studies DP 1999-10, Philippine Institute for Development Studies.
  2. David T. Llewellyn, 2002. "An analysis of the causes of recent banking crises," The European Journal of Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 8(2), pages 152-175, June.
  3. Golder, Stefan M., 1999. "Precautionary credit lines: A means to contain contagion in financial markets?," Kiel Discussion Papers 341, Kiel Institute for the World Economy (IfW).
  4. Nacer Bernou & Marceline Grondin, 2001. "Réconciliation entre libéralisation financière et croissance économique dans un système fondé sur la banque," Post-Print, HAL halshs-00179981, HAL.
  5. Ramkishen Rajan, 2010. "Restraints On Capital Flows: What Are They?," Working Papers id:2553, eSocialSciences.
  6. D.T. Llewellyn, 2000. "Some Lessons for Bank Regulation from Recent Crises," DNB Staff Reports (discontinued), Netherlands Central Bank 51, Netherlands Central Bank.
  7. Bengi Kibritcioglu & Bulent Kose & Gamze Ugur, 2001. "A Leading Indicators Approach to the Predictability of Currency," International Finance, EconWPA 0108001, EconWPA, revised 06 Sep 2001.
  8. Franz R. Hahn, 1998. "Currency Crises. A Challenge for Economic Theory and Policy," Austrian Economic Quarterly, WIFO, vol. 3(4), pages 183-190, October.
  9. Bofinger, Peter & Wollmershäuser, Timo, 2000. "Monetary policy and exchange rate targeting in open economies," W.E.P. - Würzburg Economic Papers 14, University of Würzburg, Chair for Monetary Policy and International Economics.
  10. Reuven Glick, 1998. "Thoughts on the origins of the Asia crisis: impulses and propagation mechanisms," Pacific Basin Working Paper Series, Federal Reserve Bank of San Francisco 98-07, Federal Reserve Bank of San Francisco.
  11. Bofinger, Peter & Wollmershaeuser, Timo, 2000. "Options For The Exchange Rate Policies Of The EU Accession Countries (And Other Emerging Market Economies)," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2379, C.E.P.R. Discussion Papers.
  12. Helmut Reisen, 2003. "Ratings Since the Asian Crisis," OECD Development Centre Working Papers 214, OECD Publishing.
  13. Rahul Dhumale, 2000. "Capital Adequacy Standards: Are They Sufficient?," ESRC Centre for Business Research - Working Papers, ESRC Centre for Business Research wp165, ESRC Centre for Business Research.
  14. Valpy FitzGerald (QEH), . "Finance and Growth in Developing Countries: Sound Principles and Unreliable Evidence," QEH Working Papers, Queen Elizabeth House, University of Oxford qehwps153, Queen Elizabeth House, University of Oxford.
  15. C. Rangarajan & A. Prasad, 2008. "Capital flows, exchange rate management and monetary policy," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 1(1), pages 135-149.
  16. Komarek, Lubos & Melecky, Martin, 2005. "Currency Crises, Current Account Reversals and Growth : The Compounded Effect for Emerging Markets," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 735, University of Warwick, Department of Economics.

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