Search

While there are a number of theoretical arguments in favour of capital account convertibility, or free cross-border capital mobility, in the real world cross-border trade in financial assets can in fact reduce welfare due to the effects of domestic distortions. The following paper examines the causes of the Asian financial crises of the late 1990s in this light and presents some of the lessons that would be instructive for a more effective implementation of capital account convertibility.

In the 1990s currency crises arose in different regions, e.g. in Mexico, East Asia, Russia, Brazil and Ecuador, to mention only the most important ones. What are the main factors which may trigger such events? How does globalisation and deregulation of financial markets influence the emergence of a currency crisis? What forms of crises exist? Are they driven by fundamental imbalances in a country or are they caused by self-fulfilling mechanisms involving herd behaviour and destabilising speculation? To what extent do such crises reflect implicit governmental and international guarantees which may cause moral hazard and adverse selection, thereby increasing the risk behaviour of enterprises and banks?