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Understanding recent crises in emerging markets

  • Roberto Chang

The world economy is going through a difficult and dangerous period. The recent Brazilian currency meltdown is one more in a series of events that includes the Asian crises of 1997-98 and the Mexican crash in 1994, and there is uncertainty about whether other emerging economies will be infected with the Brazilian virus. ; Dealing with crises in emerging economies is, therefore, an urgent matter. However, what to do about these crises is a source of heated debate. According to the author of this article, much of the confusion arises from the fact that accumulated knowledge about crises in emerging markets has proven inadequate for analyzing recent events. As a consequence, economists have developed new theories intended to shed light on current debates. ; In this article the author classifies the new theories into two main positions. The first, the bad policy view, argues that inappropriate government intervention provided incentives for the private sector to borrow too much and to invest in socially unproductive or excessively risky activities. The second category, the financial panic view, argues that the key issue was a maturity mismatch of assets and liabilities in national financial systems. The article compares the two viewpoints and concludes that the financial panic view has a more solid theoretical foundation and is consistent with a wider range of observations than the bad policy view.

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Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (1999)
Issue (Month): Q2 ()
Pages: 6-16

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Handle: RePEc:fip:fedaer:y:1999:i:q2:p:6-16:n:v.84no.2
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