Rethinking vulnerability to currency crises: Comments on Athukorala and Warr

Ross McLeod ()

Departmental Working Papers from The Australian National University, Arndt-Corden Department of Economics

Abstract: This paper re-examines Athukorala and Warr's ex post investigation of several Asian countries' vulnerability to balance of payments crises. It argues that their focus on 'mobile capital' is flawed in two important aspects. It also questions their ideas about exchange rate 'overvaluation', and argues that their case that this is a meaningful indicator of vulnerability is unconvincing. The finding that rapid finance sector growth seems to have been a precursor to crisis is followed up with a discussion of the policy implications, which was largely absent from the original article. The paper goes on to question the logic of the authors' finding that the crises were not caused by irrational private sector behaviour. Finally, it suggests that government policy often implicitly assumes the prevalence of such behaviour, and that vulnerability to crises results from policy that prevents continuous adjustment of the real exchange rate to changing circumstances.

Keywords: real exchange rate; capital flows; vulnerability; balance of payments crisis; exchange rate risk; capital adequacy; moral hazard (search for similar items in EconPapers)
Pages: 18 pages
Date: 2003
New Economics Papers: this item is included in nep-fin, nep-ifn and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:pas:papers:2003-11

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