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Crisis Prevention: Lessons from Mexico and East Asia

  • Sebastian Edwards

This paper provides a comparative analysis of the East Asian and Mexican crises, and draws lessons for the emerging economies. Although much of the discussion concentrates on East Asia and Mexico, I also draw on the history of some previous crisis episodes. I argue that in spite of the efforts to understand the anatomy of currency crises, there are still a large number of controversial and unresolved issues. More to the point, I argue that some of the lessons extracted from these crises are based on a misreading of the historical record. As a result, some of the policy implications that have emerged from this debate are, to say the least, questionable. In particular, I make two points: First, I argue that, in general, current account ratios have limited usefulness in determining a country's financial health. Although I fall short of taking the position that the current account is completely irrelevant, I do argue that a rigid interpretation of current account ratios may be highly misleading. Second, I argue that the rapidly growing popularity of controls on capital inflows as a device for reducing external vulnerability is rooted in a misreading of the recent history of external crises.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7233.

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Date of creation: Jul 1999
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Publication status: published as Harwood, A., R.E. Litan, and M. Pomerleano (eds.) Financial Markets and Development: The Crisis in Emerging Markets. Washington, D.C.: World Bank, 1999.
Handle: RePEc:nbr:nberwo:7233
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  1. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  2. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper tigers? A model of the Asian crisis," Research Paper 9822, Federal Reserve Bank of New York.
  3. Sebastian Edwards, 1997. "The Mexican Peso Crisis? How Much Did We Know? When Did We Know It?," NBER Working Papers 6334, National Bureau of Economic Research, Inc.
  4. Philippe Bacchetta & Eric van Wincoop, 2000. "Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 61-98 National Bureau of Economic Research, Inc.
  5. Sebastian Edwards, 1998. "Capital Inflows into Latin America: A Stop-Go Story?," NBER Working Papers 6441, National Bureau of Economic Research, Inc.
  6. Kevin Cowan & José De Gregorio, 1997. "Exchange Rate Policies and Capital Account Management: Chile in the 1990s," Documentos de Trabajo 22, Centro de Economía Aplicada, Universidad de Chile.
  7. Frederic S. Mishkin, 1999. "International Capital Movements, Financial Volatility and Financial Instability," NBER Working Papers 6390, National Bureau of Economic Research, Inc.
  8. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
  9. Eliana Cardoso & Ilan Goldfajn, 1998. "Capital Flows to Brazil: The Endogeneity of Capital Controls," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 161-202, March.
  10. Sebastian Edwards & Julio Santaella, 1993. "Devaluation Controversies in the Developing Countries: Lessons from the Bretton Woods Era," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 405-460 National Bureau of Economic Research, Inc.
  11. Calvo, Guillermo A. & Mendoza, Enrique, 1998. "Empirical Puzzles of Chilean Stabilization Policy," Working Papers 98-02, Duke University, Department of Economics.
  12. Takatoshi Ito, 2000. "Capital Flows in Asia," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 255-296 National Bureau of Economic Research, Inc.
  13. Chinn, Menzie D., 2000. "Before the fall: were East Asian currencies overvalued?," Emerging Markets Review, Elsevier, vol. 1(2), pages 101-126, September.
  14. Gian-Maria Milesi-Ferretti & Assaf Razin, 1997. "Sharp Reductions in Current Account Deficits: An Empirical Analysis," IMF Working Papers 97/168, International Monetary Fund.
  15. Sebastian Edwards, 1998. "Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences," NBER Working Papers 6800, National Bureau of Economic Research, Inc.
  16. Morris Goldstein, 1998. "The Asian Financial Crisis," Policy Briefs PB98-1, Peterson Institute for International Economics.
  17. Rudiger Dornbusch & Alejandro Werner, 1994. "Mexico: Stabilization, Reform, and No Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 253-316.
  18. Michael Gavin & Ricardo Hausmann & Leonardo Leiderman, 1995. "Macroeconomics of Capital Flows to Latin America: Experience and Policy Issues," Research Department Publications 4012, Inter-American Development Bank, Research Department.
  19. Barry Eichengreen & Andrew K. Rose, 1998. "Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises," NBER Working Papers 6370, National Bureau of Economic Research, Inc.
  20. Michael P. Dooley, 1995. "A Survey of Academic Literature on Controls over International Capital Transactions," NBER Working Papers 5352, National Bureau of Economic Research, Inc.
  21. Calvo, Guillermo A & Mendoza, Enrique G, 1996. "Petty Crime and Cruel Punishment: Lessons from the Mexican Debacle," American Economic Review, American Economic Association, vol. 86(2), pages 170-75, May.
  22. Michael Mussa & Giovanni Dell'Ariccia & Barry J. Eichengreen & Enrica Detragiache, 1998. "Capital Account Liberalization: Theoretical and Practical Aspects," IMF Occasional Papers 172, International Monetary Fund.
  23. 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(2), pages 219-294.
  24. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  25. Fischer, S. & Cooper, R.N. & Dornbusch, R. & Garber, P.M. & Massad, C. & Polak, J.J. & Rodrik, D. & Tarapore, S.S., 1998. "Should the IMF Pursue Capital-Account Convertibility?," Princeton Essays in International Economics 207, International Economics Section, Departement of Economics Princeton University,.
  26. Reinhart, Carmen & Kaminsky, Graciela, 2000. "Las crisis gemelas: las causas de los problemas bancarios y de balanza de pagos
    [The twin crises: Te causes of banking and balance of payments problems]
    ," MPRA Paper 13842, University Library of Munich, Germany.
  27. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
  28. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
  29. Obstfeld, Maurice, 1998. " Open-Economy Macroeconomics: Developments in Theory and Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(1), pages 247-75, March.
  30. Sebastian Edwards, 1988. "Structural Adjustment Policies in Highly Indebted Countries," NBER Working Papers 2502, National Bureau of Economic Research, Inc.
  31. Dooley, Michael P, 2000. "A Model of Crises in Emerging Markets," Economic Journal, Royal Economic Society, vol. 110(460), pages 256-72, January.
  32. Edwards, Sebastian & Edwards, Alejandra Cox, 1991. "Monetarism and Liberalization," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226184890.
  33. Sergio Rebelo, 1997. "What Happens When Countries Peg Their Exchange Rates? (The Real Side of Monetary Reforms)," NBER Working Papers 6168, National Bureau of Economic Research, Inc.
  34. Reinhart, Carmen & Leiderman, Leonardo, 1994. "Capital inflows to Latin America," MPRA Paper 13406, University Library of Munich, Germany.
  35. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, June.
  36. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The "Overborrowing Syndrome"," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
  37. Sergio, R., 1997. "What Happens When Countries Peg Their Exchange Rates? (The Real Side of Monetary Reforms," RCER Working Papers 441, University of Rochester - Center for Economic Research (RCER).
  38. Sebastian Edwards, 1992. "Exchange Rates as Nominal Anchors," NBER Working Papers 4246, National Bureau of Economic Research, Inc.
  39. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1995. "Capital inflows to Latin America with reference to the Asian experience," MPRA Paper 13840, University Library of Munich, Germany.
  40. Barry J. Eichengreen & Inci Ötker & A. Javier Hamann & Esteban Jadresic & R. B. Johnston & Hugh Bredenkamp & Paul R. Masson, 1998. "Exit Strategies: Policy Options for Countries Seeking Exchange Rate Flexibility," IMF Occasional Papers 168, International Monetary Fund.
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