Conventional and Insidious Macroeconomic Balance-Sheet Crises

IMF Working Papers, August 22, 2014

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Conventional and Insidious Macroeconomic Balance-Sheet Crises

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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

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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