## Different Strokes? Common and Uncommon Responses to Financial Crises

_IMF Working Papers, January 1, 2001_

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## Bibliographic details
- Authors: James M. Boughton
- Published: January 1, 2001
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451842906.001

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### 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.
- 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.

### Key findings and analysis
- Conventional macroeconomic models show a tradeoff: expansionary policies that restore internal balance may conflict with requirements for external balance.
- The feasibility of expansionary policies during crises is conditional on the ability to disregard external balance constraints.
- Structural and psychological factors (investor confidence conditions) are prominent in debate but are secondary in the short-term priority of correct macroeconomic policy.

### Policy implications and recommendations
- Short-term crisis management should prioritize correct macroeconomic policies aimed at restoring internal balance.
- Policymakers must assess whether external balance constraints can be safely ignored before pursuing expansionary policies.
- Consideration of structural reforms and measures to restore investor confidence remains important but should not displace immediate macroeconomic stabilization needs.

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## Content in this bundle

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/different-strokes-common-and-uncommon-responses-to-financial-crises-3971_