A Model of Crises in Emerging Markets

Michael Dooley

No 6300, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: First generation models of speculative attacks show that apparently random speculative attacks on policy regimes can be fully consistent with rational and well-informed speculative behavior. Unfortunately, models driven by a conflict between exchange rate policy and other macroeconomic objectives do not seem consistent with important empirical regularities surrounding recent crises in emerging markets. This has generated considerable interest in models that associate crises with self-fulfilling shifts in private expectations. " In this paper we develop a first generation model based on an alternative policy conflict. Credit constrained governments accumulate reserve assets in order to self-insure against shocks to national consumption. Governments also insure poorly regulated domestic financial markets. Given this policy regime, a variety of internal and external shocks generate capital inflows to emerging markets followed by successful and anticipated speculative attacks. We argue that a common external shock generated capital inflows to emerging markets in Asia and Latin America after 1989. Country specific factors determined the timing of speculative attacks. Lending policies of industrial country governments and international organizations account for contagion, that is, a bunching of attacks over time.

JEL-codes: F32 F34 (search for similar items in EconPapers)
Date: 1997-12
Note: IFM
References: Add references at CitEc
Citations: View citations in EconPapers (99)

Published as Dooley, M. P. "A Model Of Crises In Emerging Markets," Economic Journal, 2000, v110(460,Jan), 256-272.

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Related works:
Journal Article: A Model of Crises in Emerging Markets (2000)
Working Paper: A model of crises in emerging markets (1998)
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