Determining Underlying Macroeconomic Fundamentals During Emerging Market Crises: Are Conditions as Bad as They Seem?

40 Pages Posted: 17 Sep 2004

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Fernando Broner

CREI; Barcelona GSE; Universitat Pompeu Fabra; CEPR

Date Written: August 2004

Abstract

Emerging market crises are characterized by large swings in both macroeconomic fundamentals and asset prices. The economic significance of observed movements in macroeconomic variables is obscured by the brief and extreme nature of crises. In this paper we propose to study the macroeconomic consequences of crises by studying the behavior of "effective" fundamentals, constructed by studying the relative movements of stock prices during crises. We find that these effective fundamentals provide a different picture than that implied by observed fundamentals. First, asset prices often reflect expectations of improvement in fundamentals after the initial devaluations; specifically, effective depreciations are positive but not as large as the observed ones. Second, crises vary in their effect on credit market conditions, with investors expecting tightening of credit in some cases (Mexico 1994, Philippines 1997), but loosening of credit in others (Sweden 1992, Korea 1997, Brazil 1999).

Suggested Citation

Aguiar, Mark and Broner, Fernando, Determining Underlying Macroeconomic Fundamentals During Emerging Market Crises: Are Conditions as Bad as They Seem? (August 2004). Available at SSRN: https://ssrn.com/abstract=591081 or http://dx.doi.org/10.2139/ssrn.591081

Mark Aguiar

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Fernando Broner (Contact Author)

CREI ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

Barcelona GSE

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

CEPR ( email )

London
United Kingdom
+34 93 542 2601 (Phone)

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