The IMF and Emerging Markets Essay -- Investment Banking, Foreign Debt

In a staff paper published by the International Monetary Fund (Baig & Goldfajn, 1999), the vital question ‘was it [Asian Contagion] fundamentals driven, or was it a case of irrational, herd mentality displayed by panic-stricken investors?’ was posed. The answer to which concerned the correlation between the involved countries fundamental figures, such as its current deficit account, and investor’s reactions and how the relationship evolved over time after the initial causes of the crisis became apparent. Both the IMF report and Krugman indentified numerous cures and preventative measures highlighting exchange rate policy, financial regulation, hot money and investor expectations as key areas for consideration. (Baig & Goldfajn, 1999) Inter-temporal trade, current account deficit, original sin and exchange rate Krugman (2011) identifies developing countries as prime investment targets due to their high development potential. For Thailand and Brazil this presented the opportunity of inter-temporal trade advantages, where the developing countries offer high return on investment but lack the finance available to expand due to low national savings, and developed countries have the capital but lack the domestic opportunity, making it quite natural for such countries to run current account deficits and borrow from richer countries. A staff paper from the IMF stated this is what made Thailand & Brazil ‘victims of their own success’. (Aghevli, 1999) Unfortunately, due to the high risk of emerging countries currencies being devalued or inflated lenders stipulate repayment to be in their own currency shifting the risk onto the weaker economy. This presented them with the problem of original sin and made it difficult to honour repaymen... ...s: New York. Yagci, Fahettin. (2001) ‘choice of exchange rate regimes for developing countries’. [pdf] The World Bank: Working paper series No. 16. Available at: [Accessed 26/01/2012] BIBLIOGRAPHY Craig Burnside, Martin Eichenbaum, and Sergio Rebelo (2008), 'Currency crisis models', New Palgrave Dictionary of Economics, 2nd edition. Crocket, A. (1994) â€Å"Monetary Implications of Increased Capital Flows†. In Changing Capital Markets: Implications for Policy, Federal Reserve Bank of Kansas Krugman, P. & Maurice O. (2004) ‘International Economics Theory and Policy’. 6th edition. Delhi, India: Pearson Education Stiglitz, J. (1996). ‘Some Lessons from the East Asian Miracle’. The World Bank Research Observer. Tiwari, R. (2003). ‘Post-crisis Exchange Rate Regimes in Southeast Asia’. Seminar Paper, University of Hamburg.