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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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  • Helmut Reisen, 1998. "Domestic Causes of Currency Crises: Policy Lessons for Crisis Avoidance," OECD Development Centre Working Papers 136, OECD Publishing.
  • Handle: RePEc:oec:devaaa:136-en
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    File URL: http://dx.doi.org/10.1787/137464158356
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    Cited by:

    1. Bofinger, Peter & Wollmershäuser, Timo, 2000. "Options for the exchange rate policies in the EU accession countries (and other emerging market economies)," W.E.P. - Würzburg Economic Papers 13, University of Würzburg, Chair for Monetary Policy and International Economics.
    2. D.T. Llewellyn, 2000. "Some Lessons for Bank Regulation from Recent Crises," DNB Staff Reports (discontinued) 51, Netherlands Central Bank.
    3. David T. Llewellyn, 2002. "An analysis of the causes of recent banking crises," The European Journal of Finance, Taylor & Francis Journals, vol. 8(2), pages 152-175, June.
    4. Ramkishen Rajan, 1998. "Restraints On Capital Flows : What Are They?," Macroeconomics Working Papers 22383, East Asian Bureau of Economic Research.
    5. 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) 735, University of Warwick, Department of Economics.
    6. C. Rangarajan & A. Prasad, 2008. "Capital flows, exchange rate management and monetary policy," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 1(1), pages 135-149.
    7. 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.
    8. Valpy FitzGerald (QEH), "undated". "Finance and Growth in Developing Countries: Sound Principles and Unreliable Evidence," QEH Working Papers qehwps153, Queen Elizabeth House, University of Oxford.
    9. Reisen, Helmut, 2003. "Ratings since the Asian crisis," Copublicaciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1790, December.
    10. Rahul Dhumale, 2000. "Capital Adequacy Standards: Are They Sufficient?," Working Papers wp165, Centre for Business Research, University of Cambridge.
    11. Reuven Glick, 1998. "Thoughts on the origins of the Asia crisis: impulses and propagation mechanisms," Pacific Basin Working Paper Series 98-07, Federal Reserve Bank of San Francisco.
    12. 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).
    13. Bengi Kibritcioglu & Bulent Kose & Gamze Ugur, 2001. "A Leading Indicators Approach to the Predictability of Currency," International Finance 0108001, EconWPA, revised 06 Sep 2001.
    14. Nacer Bernou & Marceline Grondin, 2001. "Réconciliation entre libéralisation financière et croissance économique dans un système fondé sur la banque," Post-Print halshs-00179981, HAL.
    15. Lamberte, Mario B., 1999. "Currency Crisis: Where Do We Go From Here?," Discussion Papers DP 1999-10, Philippine Institute for Development Studies.
    16. Franz R. Hahn, 1998. "Currency Crises. A Challenge for Economic Theory and Policy," Austrian Economic Quarterly, WIFO, vol. 3(4), pages 183-190, October.
    17. Schnatz, Bernd, 1998. "Macroeconomic determinants of currency turbulences in emerging markets," Discussion Paper Series 1: Economic Studies 1998,03e, Deutsche Bundesbank.

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