## Conventional and Insidious Macroeconomic Balance-Sheet Crises

_IMF Working Papers, August 22, 2014_

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## Bibliographic details
- Authors: Bas B. Bakker, Leslie Lipschitz
- Published: August 22, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498389044.001

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### Overview
- Paper describes the anatomy of two types of balance-sheet macroeconomic crises: conventional balance-sheet crises and insidious crises.
- Conventional balance-sheet crises are triggered by external imbalances and balance sheet vulnerabilities, typically after capital inflows have led to a substantial build up of foreign currency exposure.
- Insidious crises are triggered by internal imbalances and balance sheet vulnerabilities, occurring in high-growth economies when an initially equilibrating shift in relative prices and resources and credit in favor of the nontraded sector overshoots equilibrium.
- The paper argues that policymakers are now better able to forestall conventional crises, but they are much less capable of early detection and avoidance of insidious crises.

### Anatomy of Conventional Balance-Sheet Crises
- Triggers:
  - External imbalances.
  - Balance sheet vulnerabilities.
- Typical sequence:
  - Capital inflows lead to a substantial build up of foreign currency exposure.
- Core vulnerabilities emphasized:
  - Foreign exchange exposure on domestic balance sheets.
  - Current account deficits and capital flow reversals.

### Anatomy of Insidious Balance-Sheet Crises
- Triggers:
  - Internal imbalances.
  - Balance sheet vulnerabilities.
- Typical context:
  - High-growth economies.
  - An equilibrating shift in relative prices, resources, and credit in favor of the nontraded sector that overshoots equilibrium.
- Detection and prevention:
  - Insidious crises are harder for policymakers to detect early and to avoid compared with conventional crises.

### Policy Implications and Interpretation
- Policymakers’ comparative capacities:
  - Better capacity to forestall conventional crises.
  - Much less capability of early detection and avoidance of insidious crises.
- Implied policy focus (as framed by the paper’s findings):
  - Monitor foreign currency exposure and capital inflow dynamics to prevent conventional crises.
  - Improve tools and indicators for internal imbalance buildup (nontraded sector booms, credit and resource shifts) to detect and mitigate insidious crises earlier.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/conventional-and-insidious-macroeconomic-balance-sheet-crises-41861_