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O C C A S I O N A L   P A P E R      
IMF-Supported Programs in Capital Account Crises

Atish Ghosh, Timothy Lane, Marianne Schulze-Ghattas, Ales Bulír,
Javier Hamann, and Alex Mourmouras

©2002 International Monetary Fund
February 6, 2002


  1.   Introduction

  2.   Pre-Crisis Conditions and Emergence of the Crisis:
        Implications for Program Design

      Pre-Crisis Conditions and Emergence of the Crisis
      Implications for Program Design

  3.   Program Financing
      Private Capital Flows: Projections and Outcomes
      Official Financing and Private Sector Involvement

  4.   Macroeconomic Frameworks and Outcomes
      Macroeconomic Frameworks in the Original Programs
      Current Account Adjustment
      Output Dynamics

  5.   Policy Programs
      Fiscal Policy
      Monetary and Exchange Rate Policy
      Structural Policies

  6.   Conclusions


  1.   Country Sample

  2.   Financial Fragilities and Official Financing

  3.   Calculation of Fiscal Sustainability and Fiscal
        Impulse Ratios

  4.   Vector Autoregression Estimates of Real Money and Real
        GDP Relationship

  5.   Chronologies of Events in Countries' Capital Account Crises



    3.1.  Official Financing in Capital Account Crisis Programs
    3.2.  Private Sector Involvement
    3.3.  Capital Controls
    4.1.  Decomposition of Output Movements into Aggregate Supply
            and Aggregate Demand Shocks
    5.1.  Social Safety Nets
    5.2.  The Interest Rate-Exchange Rate Nexus in Currency Crises:
            A Review of the Literature
    5.3.  Credit Markets and Quantity Rationing in the Asian
            Crisis Countries
    5.4.  Costs of Financial Sector Restructuring
    5.5.  Structural Measures in IMF-Supported Programs in the Asian
            Crisis Countries

Text Tables

    2.1.  Selected Macroeconomic Indicators for Capital Account
            Crisis Countries
    3.1.  Medium-Term External Debt Stability
    3.2.  Program and Actual Balance of Payment Developments
    3.3.  Selected Stock Vulnerability Indicators
    4.1.  Current Account Adjustment
    4.2.  Behavior of Inventories
    5.1.  Evolution of Fiscal Performance Criteria and Indicative Targets
    5.2.  Medium-Term Fiscal Sustainability
    5.3.  Fiscal Balances and Fiscal Impulse Ratios: Programs
            versus Outcomes
    5.4.  Firm-Level Risk Measures: Country Medians, 1995–96
    5.5.  Monetary Conditionality
    5.6.  Inflation: Program Projections and Outcomes

Appendix Tables

    A3.1.  Primary Fiscal Balances and Fiscal Impulse Ratios:
              Programs versus Outcomes
    A4.1.  Impulse Response Functions
    A5.1.  Macroeconomic Indicators in Capital Account
              Crisis Programs
    A5.2.  Balance of Payment Developments in Selected
              Asian Countries
    A5.3.  Balance of Payment Developments in Selected Latin
              American Countries

Text Figures

    2.1.  Exchange Rate Movements in Capital Account
            Crisis Countries
    2.2.  Balance of Payment Developments
    4.1.  Macroeconomic Projections and Outcomes in Capital
            Account Crisis Programs
    4.2.  Contributions to GDP Growth in Capital Account
            Crisis Programs
    4.3.  Blanchard-Quah Decompositions of Growth
    5.1.  Quarterly Fiscal Impulses and Real GDP Growth
    5.2.  Changes in Real Interest Rates and Real Exchange Rates
    5.3.  Private Capital Flows and Ex Post Dollar Rates of Return
    5.4.  Private Capital Flows and Ex Ante Dollar Rates of Return
    5.5.  Nominal and Real Overnight and Lending Rates
    5.6.  Broad Money and Banking System Credit in Real Terms
    5.7.  Real GDP, Real Credit, and Real Money
    5.8.  Structural Conditionality

Appendix Figures

    A2.1.  Crisis Index
    A2.2.  Indicators of International Liquidity


I.  Introduction

Increasing globalization of capital markets poses new challenges for the design and implementation of IMF-supported programs. These challenges have been thrown into sharpest relief in recent capital account crises, during which rapid reversals of capital inflows brought about large and abrupt current account adjustments with pervasive macroeconomic consequences.

The reversal of capital inflows in these recent crises occurred very suddenly, reflecting a sharp shift in market sentiment. This contrasts with the situation that more traditional programs were designed to tackle, where ongoing macroeconomic imbalances generally result in a relatively gradual deterioration on the external side. Although concerns over the sustainability of current account deficits and exchange rate pegs played a role, they do not explain the suddenness and magnitude of the shifts in the capital account. Various other vulnerabilities, such as adverse public debt dynamics (Brazil and Turkey), a risky public debt management strategy (Mexico), and pervasive financial sector weaknesses (e.g., Indonesia, the Republic of Korea, and Thailand) appear to have been critical in changing investor confidence.

Given the differences in their origins, IMF-supported programs in capital account crisis were confronted with challenges that differed considerably from those of more traditional IMF programs.1 Given the dominant role of private capital flows, estimates of sustainable current account positions and financing needs were subject to much greater uncertainty, the impact of the programs on market confidence became critical, and policies had to address a variety of vulnerabilities that were at the root of the crises.

There are three main reasons for focusing on a comparison of the programs formulated in response to these crises. First, the crisis cases raise issues of whether the policy response in the context of IMF-supported programs took adequate account of what was distinctive about these crises; this is particularly important in formulating an appropriate response to other capital account crises that will inevitably occur in the future. Second, they raise the more general question of whether, or to what extent, macroeconomic policies can influence the adjustment process once a crisis has erupted. Third, some of the problems confronted in these crisis cases, and the issues of crisis prevention they raise, are, writ large, those faced by other countries in the context of financial globalization.

This paper examines the experience with IMF-supported programs in the context of eight capital account crises in the 1990s. In some cases, new IMF-supported programs were formulated in response to a crisis, while in two of the countries (Argentina and the Philippines), IMF-supported arrangements that were in place at the beginning of the crisis were extended and augmented, and policies were modified. The sample includes Turkey (1994), Mexico (1995), Argentina (1995), Thailand (1997), Indonesia (1997), Korea (1997), the Philippines (1997), and Brazil (1999).2 The paper focuses on the broad macroeconomic strategy of these programs in addressing the crises: the financing and external adjustment envisaged and the role of macroeconomic and structural policies. The chronology of events in the individual countries is presented in Appendix V.


1Capital outflows, of course, are a general characteristic of balance of payments crises, such as those in the heavily indebted countries of the 1980s. However, the magnitudes involved in the capital account crisis countries, stemming from stock imbalance and vulnerabilities, made their nature qualitatively different. It would also be fair to say that, within the economics profession, there has often been very little consensus on the nature ofthe crises, or the appropriate policies for dealing with them. Krugman (2001) discusses the evolution of thinking about such crises.
2Dates refer to the year of original program approval, except in the cases of Argentina and the Philippines. Argentina (1995) refers to the Ninth Review and Extension of the extended arrangement approved in March 1992; Philippines (1997) refers to the Fourth Review and Extension of the extended arrangement approved in June 1994.