Conventional and Insidious Macroeconomic Balance-Sheet Crises
41 Pages Posted: 10 Sep 2014
Date Written: August 2014
This paper describes the anatomy of two types of balance-sheet macroeconomic crises. Conventional balance-sheet crises are triggered by external imbalances and balance sheet vulnerabilities. They typically occur 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. They occur 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.
Keywords: Fiscal imbalances, Developed countries, Emerging markets, Capital account, Balance sheets, Financial crises, crises, business cycles, capital flows, capital inflows, exchange rate, real effective exchange rate, effective exchange rate, capital markets, current account deficit, real appreciation, foreign exchange, ppp, global capital markets, foreign capital, exchange rates, capital account crises, exchange rate policy, current account deficits, fixed exchange rates, net capital, foreign exchange reserves, current account balance, exchange reserves, exchange risk, net capital flows, capital inflow, crisis prevention, foreign capital inflows, capital controls, capital control, moral hazard, fl
JEL Classification: E20, E30, F20, F3, F4, F60
Suggested Citation: Suggested Citation