External Vulnerability in Emerging Market Economies: How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion

Author/Editor:

Christian B. Mulder ; Matthieu Bussière

Publication Date:

July 1, 1999

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper investigates the factors behind the 1994 and 1997 crises and whether these can explain the 1998 crisis. The study reveals that: (i) variables used in an Early Warning System model developed by IMF staff scored well in predicting the 1998 crisis out-of-sample; (ii) all three crisis episodes can be well explained by a parsimonious set of core fundamentals and liquidity related variables; and (iii) the presence of an IMF-supported program significantly reduced the depth of crises. The results suggest that as a rule of thumb countries should hold reserves to the tune of short-term debt to avoid contagion-related crises, provided their current deficits are modest and their real effective exchange rates are not significantly misaligned.

Series:

Working Paper No. 1999/088

Subject:

Balance of payments Credit Current account deficits Early warning systems Financial crises Foreign exchange Money Real effective exchange rates Real exchange rates

English

Publication Date:

July 1, 1999

ISBN/ISSN:

9781451851144/1018-5941

Stock No:

WPIEA0881999

Pages:

41

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