The economics of money, banking, and financial markets

CHAPTER 1 

Financial Crises in Emerging Market Economies 

1

Dynamics of Financial Crises in Emerging Market Economies .......................................... 1

Stage One: Initial Phase .........................................................................................................  1

Stage Two: Currency Crises ...................................................................................................  5

Stage Three: Full-Fledged Financial Crisis .............................................................................  6

APPLICATION

  Crisis in South Korea, 1997–1998 ...................................................... 7

Financial Liberalization/Globalization Mismanaged ...............................................................  8

Perversion of the Financial Liberalization/Globalization Process: Chaebols  

and the South Korean Crisis .............................................................................................  9

Stock Market Decline and Failure of Firms Increase Uncertainty .........................................  10

Adverse Selection and Moral Hazard Problems Worsen and the Economy Contracts ...........  11

Currency Crisis Ensues .......................................................................................................  11

Final Stage: Currency Crisis Triggers Full-Fledged Financial Crisis......................................  11

Recovery Commences..........................................................................................................  13

APPLICATION

 The Argentine Financial Crisis, 2001–2002 ...................................... 13

Severe Fiscal Imbalances .....................................................................................................  13

Adverse Selection and Moral Hazard Problems Worsen .......................................................  14

Bank Panic Begins ...............................................................................................................  14

Currency Crisis Ensues .......................................................................................................  14

Currency Crisis Triggers Full-Fledged Financial Crisis ........................................................  15

Recovery Begins...................................................................................................................  17

Global   When an Advanced Economy Is Like an Emerging Market Economy:  

The Icelandic Financial Crisis of 2008  18

Preventing Emerging Market Financial Crises ......................................................................  18

Beef Up Prudential Regulation and Supervision of Banks.....................................................  18

Encourage Disclosure and Market-Based Discipline .............................................................  19

Limit Currency Mismatch ....................................................................................................  19

Sequence Financial Liberalization ........................................................................................  20

Summary  20   •   Key Terms  20   •   Questions  21