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Currency Crises and Fiscal Imbalances. The Transition Countries Perspective

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  • Joanna Siwinska-Gorzelak

Abstract

The financial innovations and increased integration of capital markets have made the nature of balance of payments turmoil much more complex, than described by firstgeneration models. The severe financial crises, which erupted in 1990's in many seemingly "invulnerable" economies that in most cases were characterised by a balanced budget and a modest public debt have turned away the attention of analysts and policymakers from fiscal variables towards other determinants. The fiscal factors, nonetheless, still remain among important causes of financial turbulences, especially in emerging markets, what has been manifested by the 1998/1999 crises of FSU (Former Soviet Union) economies. The purpose of this paper is to re-examine the theoretical and empirical links between fiscal sector and the emergence of financial crises, with an emphasis on transition economies. It outlines the main theoretical channels and seeks for the empirical evidence of the influence of fiscal sector on the vulnerability to currency crises in developing and transition countries. Using a large sample of developing and transition countries, it examines the pattern of fiscal variables before and during the crisis, to see whether, on average, the behaviour of fiscal variables during a crisis is different form tranquil periods. The results indicate, that in the case of developing as well as Central European and CIS countries, the crisis is, on average preceded by larger, than in normal times, fiscal deficits and higher level of public debt. The paper also assesses the recent series of financial crises that have emerged in FSU economies. These turbulences, have once again demonstrated the crucial role of fiscal sustainability in the overall vulnerability to negative external developments. The FSU countries, which experienced a crisis, did, on average, exhibit more widespread fiscal weaknesses and/or their external liabilities were more vulnerable to turbulences than other countries in that group. However, the fiscal imbalances of FSU economies were not just a consequence of the conducted fiscal policy. They were also a manifestation of the deeper structural shortcomings and the lack of consistent reforms: soft budget constraints across the economy, weak governments, inefficient tax systems, Soviet-type budget expenditures. Overall, empirical research indicates that in developing and transition countries, fiscal variables remain among factors that increase the likelihood of exchange rate and financial pressures.

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Bibliographic Info

Paper provided by CASE-Center for Social and Economic Research in its series CASE Network Studies and Analyses with number 0219.

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Length: 72 Pages
Date of creation: 2000
Date of revision:
Handle: RePEc:sec:cnstan:0219

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Keywords: currency crisis; transition countries;

References

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  1. W.H. Buiter, 1997. "Aspects of Fiscal Performance in Some Transition Economies Under Fund-Supported Programs," CEP Discussion Papers dp0333, Centre for Economic Performance, LSE.
  2. Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers 97/79, International Monetary Fund.
  3. Jeffrey J. Frankel and Andrew K. Rose., 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," Center for International and Development Economics Research (CIDER) Working Papers C96-062, University of California at Berkeley.
  4. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Current Account Sustainability: Selected East Asian and Latin American Experiences," NBER Working Papers 5791, National Bureau of Economic Research, Inc.
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  7. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," Working Paper 98-10, Federal Reserve Bank of Atlanta.
  8. Flood, Robert & Marion, Nancy, 1999. "Perspectives on the Recent Currency Crisis Literature," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-26, January.
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  14. George C. Tsibouris & Vito Tanzi, 2000. "Fiscal Reform Over Ten Years of Transition," IMF Working Papers 00/113, International Monetary Fund.
  15. Thierry D. Buchs, 1999. "Financial crisis in the Russian Federation: Are the Russians learning to tango?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(3), pages 687-715, November.
  16. Sebastian Edwards, 1996. "A Tale of Two Crises: Chile and Mexico," NBER Working Papers 5794, National Bureau of Economic Research, Inc.
  17. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1995. "The Collapse of the Mexican Peso: What Have We Learned?," Harvard Institute of Economic Research Working Papers 1724, Harvard - Institute of Economic Research.
  18. Luca Barbone & Hana Polackova, 1996. "Public Finances and Economic Transition," CASE Network Studies and Analyses 0068, CASE-Center for Social and Economic Research.
  19. Steven Fries & Martin Raiser & Nicholas Stern, 1999. "Stress test for reforms: Transition and East Asian 'contagion'," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(2), pages 535-567, July.
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Cited by:
  1. Marek Dabrowski, 2001. "Currency Crises in Emerging Markets - Selected Comparative Studies," CASE Network Reports 0041, CASE-Center for Social and Economic Research.

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