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Unformatted text preview: S e r i e s Working Paper N U M B E R W P 0 5 - 7 J U L Y 2 0 0 5 What Might the Next Emerging-Market Financial Crisis Look Like? Morris Goldstein with the assistance of Anna Wong Morris Goldstein, Dennis Weatherstone Senior Fellow since 1994, held several senior staf positions at the International Monetary Fund (1970–94), including deputy director o¡ its Research Department (1987–94). He is author or coauthor o¡ Adjusting China’s Exchange Rate Policies (WP 04-1), Controlling Currency Mismatches in Emerging Markets (2004), Managed Floating Plus (2002), and The Asian Financial Crisis: Causes, Cures, and Systemic Implications (1998). Anna Wong is a research assistant at the Institute ¡or International Economics. Abstract Tis paper addresses the following question: If a Fnancial crisis a¡ecting a group of emerging economies were to take place sometime over the next three years, where would the crisis likely originate, how could it be transmitted to other economies, and which economies would be most a¡ected by particular transmission or contagion mechanisms? A set of indicators is presented to gauge the vulnerability of individual emerging economies to various shocks, including a slowdown in import demand in both China and the United States, a fall in primary commodity prices, increased costs and lower availability of external Fnancing, alternative patterns of exchange rate changes, and pressures operating on monetary and Fscal policies in emerging economies. Note: Revised and updated version of paper originally prepared for World Bank/Brookings conference on “Te ¢inancial Sector Post-Crisis: Challenges and Vulnerabilities,” Brookings Institution, Washington, DC, April 26, 2005. I am indebted to C. ¢red Bergsten, Jim Hanson, Nick Lardy, Michael Mussa, Jim O’Neill, Brad Setser, £ed £ruman, and Philip £urner for helpful comments on an earlier draft. I likewise want to thank Gerry Caprio, Yusuke Horiguchi, Kalpana Kochar, Eric Torres, and Philip £urner for sharing some of their data with me. JEL classiFcation: ¢41, ¢34, ¢31, ¢37 JEL keywords: emerging markets, Fnancial crisis, China slowdown, US current account Copyright © 2005 by the Institute for International Economics. All rights reserved. No part of this working paper may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by information storage or retrieval system, without permission from the Institute. 1 7 5 0 M A S S A C H U S E T T S A V E N U E , N W | W A S H I N G T O N , D C 2 0 0 3 6 - 1 9 0 3 T E L : ( 2 0 2 ) 3 2 8 - 9 0 0 0 | F A X : ( 2 0 2 ) 6 5 9 - 3 2 2 5 | W W W . I I E . C O M I. INTRODUCTION This paper is a speculative exercise in thinking about what the next emerging-economy financial crisis might look like. By a financial crisis, I mean a currency crisis, or a banking crisis, or a debt crisis, or some combination of the three....
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