Lending Booms and Currency Crises

Aaron Tornell

in Regional and Global Capital Flows

Published by University of Chicago Press

Published in print July 2001 | ISBN: 9780226386768
Published online February 2013 | e-ISBN: 9780226387017 | DOI:
Lending Booms and Currency Crises

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This chapter examines the linkages between currency and financial crises, and the similarities between the Asian crises of 1997 to the “tequila” crisis in Mexico at the end of 1994. It suggest that countries with “sound fundamentals” (real exchange rates that have not appreciated, the strength of the banking system, and the liquidity of the central bank) are not likely to be vulnerable to crises even when one occurs somewhere else in the world. However, countries whose fundamentals are weaker are vulnerable to crisis, in the sense that if one country is in crisis, the other countries will be attacked if investors turn pessimistic. This conclusion implies that, once fundamentals are weak, the risk of crisis is linked to investors' expectations. To the extent that those expectations shift abruptly, countries may experience crisis. Insofar as investors' expectations cannot be explained, the timing of crises cannot be explained. Two commentaries are included at the end of the chapter.

Keywords: currency; Asian financial crises; tequila crisis; Mexico; economic fundamentals

Chapter.  9774 words.  Illustrated.

Subjects: International Economics

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