The Asian financial crisis of 1997–98 was one of the most dramatic economic events of recent times, which raised many questions regarding the appropriate policy response to financial crises. This paper reviews the experience of this crisis, focusing on the overall strategy of crisis management and the way that strategy was implemented including, with regard to official and private financing, structural reforms, and monetary and fiscal policies.
Recent financial crises in emerging markets have been followed by temporary but substantial losses in output. This paper explores the possibility that threats of such losses are the dominant incentive for repayment of international debt. In this environment private debtors and creditors have strong incentives to design international contracts so that renegotiation is costly. Such contracts generate dead weight losses following crises. Proposals to modify contractual arrangements, or to facilitate or impose renegotiation, can be welfare-improving under special circumstances. However, it is likely that such proposals would also weaken the incentives that make private international debt possible.
Flawed government policies have been offered as an explanation for currency crises in most of the previous literature. With few exceptions, the role of the banking system is ignored. Empirical evidence suggests that in recent decades banking crises and currency crises have been linked. A model is developed here where the “twin” crises result from low asset returns. Large movements in exchange rates are desirable to the extent that they allow better risk-sharing between a country's bank depositors and the international bond market. The rationale for using short-term debt denominated in a foreign reserve currency is also investigated.
In this paper we first trace the changing nature of banking, currency, and debt crises from the last century to the present. Each type of crisis has transmogrified in the presence of official intervention and the creation of a safety net. A similar pattern is observed for international rescue loans. We then present evidence suggesting that the incidence has increased and the severity of financial crises has changed little in emerging markets from the pre-1914 era to the present. Finally we assess the impact of IMF loans on the macro performance of the recipients. A simple with-without comparison of countries receiving IMF assistance during crises in the period 1973–98 with countries in the same region not receiving assistance suggests that the real performance of the former group was possibly worse than the latter. Similar results obtain adjusting for self-selection bias and counterfactual policies.
The effects of product and process innovations on economic fluctuations are studied in this paper. The main features of the model are endogenous product innovations and lower-bound consumption constraints on each variety. Results show that in cases when productivity is low compared to the number of available varieties, process innovations increase economic activity, whereas, the effects of product innovations are not significant. However, if the number of different varieties of goods available is low compared to productivity and the lower-bound consumption constraints bind, process innovations might be contractionary.
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