External Vulnerability in Emerging Market Economies: How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion

Christian Mulder () and Matthieu Bussiere

No 1999/088, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates the factors behind the 1994 and 1997 crises and whether these can explain the 1998 crisis. The study reveals that: (i) variables used in an Early Warning System model developed by IMF staff scored well in predicting the 1998 crisis out-of-sample; (ii) all three crisis episodes can be well explained by a parsimonious set of core fundamentals and liquidity related variables; and (iii) the presence of an IMF-supported program significantly reduced the depth of crises. The results suggest that as a rule of thumb countries should hold reserves to the tune of short-term debt to avoid contagion-related crises, provided their current deficits are modest and their real effective exchange rates are not significantly misaligned.

Keywords: WP; short-term debt; exchange rate; economic crisis; reserve; Vulnerability indicators; economic crises; emerging markets; lending boom variable; crisis index; EWS variable; short-term debt debt ratio; exchange rate appreciation; reserves variable; Current account deficits; Credit; Real exchange rates; Real effective exchange rates; Early warning systems; Asia and Pacific; Africa (search for similar items in EconPapers)
Pages: 41
Date: 1999-07-01
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Citations: View citations in EconPapers (122)

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