Edited by Klaus Liebscher, Josef Christl, Peter Mooslechner and Doris Ritzberger-Grünwald
Chapter 4: Financial Globalization and Exchange Rate Arrangements
Graciela Laura Kaminsky1 The crises of the 1990s fuelled a renewed interest in the causes of speculative attacks. Many claim that these crises were of a diﬀerent nature than the crises of the 1960s and 1970s, arguing that while the latter had been triggered by ﬁscal and monetary problems, the crises of the 1990s were caused by weaknesses in the banking sector and overall ﬁnancial fragility.2 It is further asserted that the ﬁnancial fragility that preceded these crises was sparked by over-borrowing in international capital markets and the concentration of the debt in foreign currency, with Rodrik (1998) and Eichengreen (1999 and 2005) further concluding that unfettered international capital ﬂows were at the core of these problems. These crises also resuscitated old debates (with new clothes) about the role of exchange rate regimes, with many arguing that ﬁxed exchange rate regimes trigger ﬁnancial excesses and liability dollarization.3 This chapter will review the theoretical debate and the empirical evidence on balance sheet problems and their causes. 4.1 FINANCIAL LIBERALIZATION The crises of the 1990s have claimed many victims: entire banking systems collapsed around the world, roaring growing economies succumbed to their worst recession in modern times and the booming international capital ﬂows of the early 1990s dwindled to a trickle. This is not all. Perhaps the most important casualty of these crises has been the support for domestic and international ﬁnancial liberalization. In the aftermath of the Asian crisis, many concluded that globalization had gone too far and had led...