1Alternative Approaches to Financial Crises in Emerging Markets

Developing countries fall into international financial crises for a variety of reasons, including fiscal profligacy, exchange rate mismanagement, international financial shocks, financial liberalization, and weaknesses in the domestic banking sector. Market expectations may play an independent role in a financial crisis, by triggering a self-fulfilling financial panic. International public policy should be aimed first and foremost at avoiding financial crises, but must also be prepared to ameliorate financial crises after they begin. Despite ample experience with financial crises in the past decade, there are still serious differences of opinion with regard to best means of their avoidance, and their proper management once they occur. These difference relate to the appropriate roles of exchange rate policy, banking policy, fiscal policy, and the international institutions. The purpose of this paper is to review the lessons of the past decade, in order to draw some policy conclusions for developing country governments and for international institutions such as the IMF, World Bank, and the Bank for International Settlements