Impacts, Transmission and Recovery
KDI/EWC series on Economic Policy
Edited by Maurice Obstfeld, Dongchul Cho and Andrew Mason
Marcos Chamon, Atish Ghosh and Jun Il Kim INTRODUCTION Are all emerging market economies’ (EMEs) crises alike? Yes and no. While countries have experienced balance of payments crises since time immemorial, the more spectacular “capital account” crises first came to the fore with Mexico’s devaulation in December 1994. Setting the stage for subsequent crises in East Asia and Latin America, Mexico’s crisis was characterized by a sharp correction of the currency and the current account, together with a collapse of output and economic activity. Broadly similar outcomes were observed following Russia’s 1998 devaluation cum default, Brazil’s abandonment of its peg in 1999 and both Turkey’s 2001 and Argentina’s 2002 crises. But while the consequences of these crises show characteristic similarities (output and exchange rate collapse, sharp reversal of the current account as private financing is withdrawn, see Figure 10.1), their causes appear bewilderingly different. Thus Mexico and Russia’s crises stemmed from difficulties in funding the public sector. In Brazil (1998–99), Turkey (2000–01) and Argentina (2002) public sector debt dynamics played a key role—in the latter two cases, accompanied by a banking crisis. On the other hand, Uruguay (2002) was a banking crisis—caused by withdrawals of Argentine deposits—that spilled into a public sector debt problem and a balance of payments crisis. Nor has the academic literature been particularly successful at developing a unified theory of currency crises. In the early models (Krugman 1979; Flood and Garber 1984), the peg was undermined by the government money-financing its...
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