Different Strokes? Common and Uncommon Responses to Financial Crises

January 1, 2001

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

Much of the debate about the management of financial crises has focused on structural and psychological issues regarding the conditions that are supposed to be necessary to restore investor confidence. Nonetheless, the paramount requirement in the short term is for countries in crisis to adopt correct macroeconomic policies. An analysis of conventional macroeconomic models reveals that countries can afford to run expansionary policies to restore internal balance only if they can afford to ignore the requirements for external balance. This arithmetic does not depend on whether macroeconomic policies were inappropriate before the crisis hit.

Subject: Balance of payments, Capital flows, Capital inflows, Capital outflows, Financial crises, Fiscal policy

Keywords: Asia and Pacific, Capital flows, Capital inflows, Capital outflows, currency depreciation, debtor country, demand management, East Asia, exchange rate, expansionary monetary policy, external shock, financial collapse, financial crises, fund staff, macroeconomic models, reserve response, WP

Pages:
19
Volume:
2001
DOI:
https://doi.org/10.5089/9781451842906.001
Issue:
012
Series:
Working Paper No. 2001/012
Stock No:
WPIEA0122001
ISBN:
9781451842906
ISSN:
1018-5941

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