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Regional and Global Capital FlowsMacroeconomic Causes and Consequences$
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Takatoshi Ito Ito and Anne O. Krueger

Print publication date: 2001

Print ISBN-13: 9780226386768

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226387017.001.0001

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Lending Booms and Currency Crises

Lending Booms and Currency Crises

Empirical Link

(p.47) 2 Lending Booms and Currency Crises
Regional and Global Capital Flows

Aaron Tornell

University of Chicago Press

This chapter examines the linkages between currency and financial crises, and the similarities between the Asian crises of 1997 to the “tequila” crisis in Mexico at the end of 1994. It suggest that countries with “sound fundamentals” (real exchange rates that have not appreciated, the strength of the banking system, and the liquidity of the central bank) are not likely to be vulnerable to crises even when one occurs somewhere else in the world. However, countries whose fundamentals are weaker are vulnerable to crisis, in the sense that if one country is in crisis, the other countries will be attacked if investors turn pessimistic. This conclusion implies that, once fundamentals are weak, the risk of crisis is linked to investors' expectations. To the extent that those expectations shift abruptly, countries may experience crisis. Insofar as investors' expectations cannot be explained, the timing of crises cannot be explained. Two commentaries are included at the end of the chapter.

Keywords:   currency, Asian financial crises, tequila crisis, Mexico, economic fundamentals

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