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Rethinking vulnerability to currency crises: Comments on Athukorala and Warr

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  • Ross H McLeod

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Abstract

This paper re-examines Athukorala and Warr's ex post investigation of several Asian countries' vulnerability to balance of payments crises. It argues that their focus on 'mobile capital' is flawed in two important aspects. It also questions their ideas about exchange rate 'overvaluation', and argues that their case that this is a meaningful indicator of vulnerability is unconvincing. The finding that rapid finance sector growth seems to have been a precursor to crisis is followed up with a discussion of the policy implications, which was largely absent from the original article. The paper goes on to question the logic of the authors' finding that the crises were not caused by irrational private sector behaviour. Finally, it suggests that government policy often implicitly assumes the prevalence of such behaviour, and that vulnerability to crises results from policy that prevents continuous adjustment of the real exchange rate to changing circumstances.

Suggested Citation

  • Ross H McLeod, 2003. "Rethinking vulnerability to currency crises: Comments on Athukorala and Warr," Departmental Working Papers 2003-11, The Australian National University, Arndt-Corden Department of Economics.
  • Handle: RePEc:pas:papers:2003-11
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    File URL: https://crawford.anu.edu.au/acde/publications/publish/papers/wp2003/wp-econ-2003-11.pdf
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    References listed on IDEAS

    as
    1. Ross McLeod, 1999. "Control and competition: Banking deregulation and reā€regulation in Indonesia," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 4(2), pages 258-297.
    2. Ross McLeod, 1997. "Survey of Recent Developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 33(1), pages 3-43.
    3. Ross McLeod, 2000. "Survey of Recent Developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 36(2), pages 5-41.
    4. Prema-chandra Athukorala & Peter G. Warr, 2002. "Vulnerability to a Currency Crisis: Lessons from the Asian Experience," The World Economy, Wiley Blackwell, vol. 25(1), pages 33-57, January.
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    Keywords

    real exchange rate; capital flows; vulnerability; balance of payments crisis; exchange rate risk; capital adequacy; moral hazard;

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