Lecturer: Paolo Pesenti (bio)

Presentation
61 pages / 147 kb

Summary
Emerging markets that have opened to foreign capital have seen it contribute to improved living standards. At the same time, capital flow volatility has made these markets vulnerable to boom and bust cycles. The severity of recent currency and financial crises has fueled debate over whether instability stems from arbitrary shifts in market expectations and confidence, or from weak economic fundamentals.

A balanced assessment of the evidence recognizes that unsustainable fundamental imbalances expose a country to shifts in investor sentiment and that, once a crisis does occur, inadequate banking and financial supervision along with structural links among countries reinforce a downward spiral. Economic analysis also suggests that a strong and fast policy response complemented by international financial assistance and private sector involvement can help restore market confidence and economic stability. The appropriate combination of these elements in managing financial turmoil and guaranteeing orderly debt restructuring depends on the specific nature of the crisis. Recent debate on the international financial architecture emphasizes that the effects of liberalizing capital controls on economic growth and stability may not be the same for all countries, and that adequate supervision and enforcement are preconditions for lifting restrictions on international borrowing and lending.

Recommended readings
Nouriel Roubini's Global Macroeconomic and Financial Policy Site
Offers the best Ariadne's thread to the literature on currency and financial crises in emerging markets.

For a survey of the policy debate on the international financial architecture, see:
The International Financial Architecture: What's New? What's Missing?
By Peter Kenen, Institute for International Economics, November 2001

The Institute for International Economics bookstore

The following conference papers are strongly recommended:

• NBER Conference on Preventing Currency Crises in Emerging Markets
  January 11-13, 2001
  (especially "A Primer on Emerging Market Crises" by Rudi Dornbusch)
  
• NBER Conference on Managing Currency Crises in Emerging Markets
  March 28-31, 2001
  
• Bank of England Conference on the Role of the Official and Private Sectors in Resolving International Financial Crises
  July 23-24, 2002

The following articles and speeches by central bank officials and staff economists are also particularly relevant:

Financial Crises in the Emerging Markets: The Roles of the Public and Private Sectors
By Terrence J. Checki and Ernest Stern, Current Issues in Economics and Finance 6 (13), Nov 2000

Toward Greater Financial Stability
Remarks by President William J. McDonough at the Bank of Thailand in Bangkok, Thailand
February 5, 2001

Capital Controls and Emerging Markets
By Ramon Moreno, Economic Letter 2001-25, August 31, 2001

Recent Emerging Market Crises - What have we Learned?
By Guillermo Ortiz, Per Jacobson Lecture in Basle, Switzerland, 2002, 82 pages / 269kb

The Economics of Currency Crises and Contagion: An Introduction
By Paolo Pesenti and Cédric Tille, Economic Policy Review, 6 (3), September 2000