Output Costs of Currency and Balance of Payments Crises in Emerging Markets

Abstract:     
We investigate the output effects of severe currency crises in emerging markets. Using a panel data set over the 1975-97 period and covering 24 emerging-market economies, we find that currency and balance of payments crises?even after controlling for other factors?reduce output by about 5-8 percent over a two-three year period. This adverse effect is two to four times larger than the average output loss in a developing economy. Typically, growth tends to return to trend by the third year following the crisis. The large output costs are likely related to their dependence on private capital markets and abrupt reversals in capital inflows that in turn force substantial real-side adjustment.

Number of Pages in PDF File: 28

JEL Classification: E63, F34, F41, O19

working papers series