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Indirect and Compounded Effects of External Crises on Growth in Emerging Markets


  • Martin Melecky

    (School of Economics, University of New South Wales)


An attempt to quantify possible negative effects of external crises in emerging market economies is made in this paper. The direct and indirect effects of the external crises, here sudden stops in capital flows and currency crises, are estimated and compounded into composite overall effects. In addition, an alternative approach for the analysis of the dynamics is introduced. I find that a current account reversal has a negative effect, both direct and indirect, on economic growth introducing a slowdown exceeding two percentage points in the current year. On the other hand, the direct effect of currency crises is insignificant and unlike in the case of the reversal the indirect effect dominates and delivers a negative overall effect of 1.8 percentage points. The time necessary for the adjustment of actual growth back to its equilibrium rate is roughly 1.8 years after the current account reversal and 1.6 years after the currency crisis. The corresponding cumulative losses are four and 3.3 percentage points for the reversal and the currency crisis, respectively.

Suggested Citation

  • Martin Melecky, 2005. "Indirect and Compounded Effects of External Crises on Growth in Emerging Markets," International Finance 0502002, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpif:0502002
    Note: Type of Document - pdf; pages: 34

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    Cited by:

    1. David Fernando LOPEZ ANGARITA, 2006. "Nivel óptimo de Reservas Internacionales y crisis cambiaria en Colombia," Archivos de Economía 003273, Departamento Nacional de Planeación.

    More about this item


    External Crises; Economic Growth; Emerging Market Economies; Panel Data.;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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