Atish Ghosh, Timothy Lane, Marianne Schulze-Ghattas, Ales Bulír,
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
5.4. Costs of Financial Sector Restructuring
5.5. Structural Measures in IMF-Supported Programs in the Asian
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
5.4. Firm-Level Risk Measures: Country Medians, 1995–96
5.5. Monetary Conditionality
5.6. Inflation: Program Projections and Outcomes
Programs versus Outcomes
A4.1. Impulse Response Functions
A5.1. Macroeconomic Indicators in Capital Account
A5.2. Balance of Payment Developments in Selected
A5.3. Balance of Payment Developments in Selected Latin
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
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
A2.2. Indicators of International Liquidity
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.