External Vulnerability in Emerging Market Economies: How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion

By Christian B. Mulder, Matthieu Bussière

July 1, 1999

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Christian B. Mulder, and Matthieu Bussière. External Vulnerability in Emerging Market Economies: How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion, (USA: International Monetary Fund, 1999) accessed December 12, 2024

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

This paper investigates the factors behind the 1994 and 1997 crises and whether these can explain the 1998 crisis. The study reveals that: (i) variables used in an Early Warning System model developed by IMF staff scored well in predicting the 1998 crisis out-of-sample; (ii) all three crisis episodes can be well explained by a parsimonious set of core fundamentals and liquidity related variables; and (iii) the presence of an IMF-supported program significantly reduced the depth of crises. The results suggest that as a rule of thumb countries should hold reserves to the tune of short-term debt to avoid contagion-related crises, provided their current deficits are modest and their real effective exchange rates are not significantly misaligned.

Subject: Balance of payments, Credit, Current account deficits, Early warning systems, Financial crises, Foreign exchange, Money, Real effective exchange rates, Real exchange rates

Keywords: Africa, Asia and Pacific, Credit, Crisis index, Current account deficits, Early warning systems, Economic crises, Economic crisis, Emerging markets, EWS variable, Exchange rate, Exchange rate appreciation, Lending boom variable, Real effective exchange rates, Real exchange rates, Reserve, Reserves variable, Short-term debt, Short-term debt debt ratio, Vulnerability indicators, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1999/088
Stock No:

WPIEA0881999
ISBN:

9781451851144
ISSN:

1018-5941

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