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Financial Crisis, Capital Outflows and Policy Responses: Simple Analytics and Examples from East Asia

  • Ramkishen Rajan

    ()

    (School of Economics, University of Adelaide, Australia)

Financial crises seem to have become the norm rather than the exception since 1992. In recognition of the frequency with which countries seem to be hit by financial crises, any typical undergraduate course in Money and Banking nowadays includes a section on financial crisis in emerging economies. While these texts offer useful and up-to-date discussions on concepts such as financial crises and sterilization of capital flows, there does not seem to be any attempt to link the discussion of these contemporary issues to the age-old analytics of the money market and money multiplier. This paper examines the impact of a crisis of confidence and resultant capital outflows from a small and open economy, and the possible policy options in response to such outflows using simple tools and definitions that will be familiar to any Money and Banking/Intermediate Macroeconomics student. To facilitate the discussion, examples are drawn from the East Asian crisis of 1997-98 (Indonesia, Korea, Malaysia and Thailand), though the analysis remains pertinent to emerging economies in general.

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Paper provided by University of Adelaide, Centre for International Economic Studies in its series Centre for International Economic Studies Working Papers with number 2003-11.

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Length: 35 pages
Date of creation: Apr 2003
Date of revision:
Handle: RePEc:adl:cieswp:2003-11
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  1. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  2. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
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