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Emerging Market Economies: economies in an
earlier stage of market development that have
recently opened up to the flow of goods,
services, and capital from the rest of the world.
High growth rate, less restrictions
Mexican crisis in 1994
East Asian crisis in 1997-98
Argentine Crisis in 2001-02
Stage1: Initiation of Financial Crisis
Path1: Mismanagement of Financial
1) Eliminating restrictions
Fixed Exchange Rate
Interest Rate increases
2) Weak Supervision
3) Moral hazard problems and adverse selection
4) Deterioration in bank’s balance sheets
Example: Mexico East Asia
Path 2: Severe Fiscal Imbalances
1) Government runs deficit
2) Banks are forced to purchase bonds
3) As bonds price declines, banks asset value
4) Lending contraction
Example: Argentina
Other Factors
Interest Rate
Stock market decline
Uncertainty on political system
Stage 2: Currency Crisis
To hold fixed exchange rate, government needs
to hold large amount of foreign reserves.
Speculative attack: speculators engage in
massive sales of the domestic currency until it
Government runs out of foreign reserves
Domestic currency depreciates
Example: East Asian Financial Crisis
Quantum Endowment Fund
Stage 3: Full-fledged Financial Crisis
Debts increases in terms of foreign currency
High Inflation Rate
Banks fail