Crisis Prevention: Lessons from Mexico and East Asia

65 Pages Posted: 31 Mar 2000 Last revised: 8 Oct 2022

See all articles by Sebastian Edwards

Sebastian Edwards

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area; National Bureau of Economic Research (NBER)

Date Written: July 1999

Abstract

This paper provides a comparative analysis of the East Asian and Mexican crises, and draws lessons for the emerging economies. Although much of the discussion concentrates on East Asia and Mexico, I also draw on the history of some previous crisis episodes. I argue that in spite of the efforts to understand the anatomy of currency crises, there are still a large number of controversial and unresolved issues. More to the point, I argue that some of the lessons extracted from these crises are based on a misreading of the historical record. As a result, some of the policy implications that have emerged from this debate are, to say the least, questionable. In particular, I make two points: First, I argue that, in general, current account ratios have limited usefulness in determining a country's financial health. Although I fall short of taking the position that the current account is completely irrelevant, I do argue that a rigid interpretation of current account ratios may be highly misleading. Second, I argue that the rapidly growing popularity of controls on capital inflows as a device for reducing external vulnerability is rooted in a misreading of the recent history of external crises.

Suggested Citation

Edwards, Sebastian, Crisis Prevention: Lessons from Mexico and East Asia (July 1999). NBER Working Paper No. w7233, Available at SSRN: https://ssrn.com/abstract=202745

Sebastian Edwards (Contact Author)

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