Managing Currency Crises in Emerging Markets A National Bureau of Economic Research Conference Report Managing Currency Crises in Emerging Markets Edited by Michael P Dooley and Jeffrey A Frankel The University of Chicago Press Chicago and London M P D is a research associate of the National Bureau of Economic Research and a managing editor of the International Journal of Finance and Economics Professor Dooley joined the faculty at the University of California, Santa Cruz, in 1992 following more than twenty years’ service at the Board of Governors of the Federal Reserve System and the International Monetary Fund J A F is the James W Harpel Professor of Capital Formation and Growth at the Kennedy School of Government and director of the International Finance and Macroeconomics program at the National Bureau of Economic Research To Rudiger Dornbusch, from whom we have learned so much The University of Chicago Press, Chicago 60637 The University of Chicago Press, Ltd., London © 2003 by the National Bureau of Economic Research All rights reserved Published 2003 Printed in the United States of America 11 10 09 08 07 06 05 04 03 ISBN: 0-226-15540-4 (cloth) Chapter 8, “An Evaluation of Proposals to Reform the International Financial Architecture” by Morris Goldstein © 2001, Institute for International Economics Comment by Edwin M Truman on chapter 11, “IMF and World Bank Structural Adjustment Programs and Poverty” by William Easterly © 2001, Institute for International Economics Library of Congress Cataloging-in-Publication Data Managing currency crises in emerging markets / edited by Michael P Dooley and Jeffrey A Frankel p cm — (A National Bureau of Economic Research conference report) Proceedings of a conference held in Monterey, Calif., in March 2001 Includes bibliographical references and index ISBN 0-226-15540-4 (cloth : alk paper) Currency question—Developing countries—Congresses Foreign exchange rates—Developing countries—Congresses Financial crises—Developing countries—Congresses I Dooley, Michael P II Frankel, Jeffrey A III Series HG1496 M36 2003 332.4'91724—dc21 2002018126 o The paper used in this publication meets the minimum requirements of the American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials, ANSI Z39.48-1992 National Bureau of Economic Research Officers Carl F Christ, chairman Michael H Moskow, vice-chairman Martin Feldstein, president and chief executive officer Susan Colligan, vice president for administration and budget and corporate secretary Robert Mednick, treasurer Kelly Horak, controller and assistant corporate secretary Gerardine Johnson, assistant corporate secretary Directors at Large Peter C Aldrich Elizabeth E Bailey John H Biggs Andrew Brimmer Carl F Christ John S Clarkeson Don R Conlan George C Eads Martin Feldstein Stephen Friedman Judith M Gueron George Hatsopoulos Karen N Horn Judy C Lewent John Lipsky Michael H Moskow Alicia H Munnell Rudolph A Oswald Robert T Parry Peter G Peterson Richard N Rosett Kathleen P Utgoff Marina v N Whitman Martin B Zimmerman Directors by University Appointment George Akerlof, California, Berkeley Jagdish Bhagwati, Columbia William C Brainard, Yale Glen G Cain, Wisconsin Franklin Fisher, Massachusetts Institute of Technology Saul H Hymans, Michigan Marjorie B McElroy, Duke Joel Mokyr, Northwestern Michael J Brennan, California, Los Angeles Andrew Postlewaite, Pennsylvania Nathan Rosenberg, Stanford Michael Rothschild, Princeton Craig Swan, Minnesota David B Yoffie, Harvard Arnold Zellner, Chicago Directors by Appointment of Other Organizations Mark Drabenstott, American Agricultural Economics Association Gail D Fosler, The Conference Board A Ronald Gallant, American Statistical Association Robert S Hamada, American Finance Association Robert Mednick, American Institute of Certified Public Accountants Angelo Melino, Canadian Economics Association Richard D Rippe, National Association for Business Economics John J Siegfried, American Economic Association David A Smith, American Federation of Labor and Congress of Industrial Organizations Josh S Weston, Committee for Economic Development Gavin Wright, Economic History Association Directors Emeriti Thomas D Flynn Lawrence R Klein Franklin A Lindsay Paul W McCracken Bert Seidman Eli Shapiro Since this volume is a record of conference proceedings, it has been exempted from the rules governing critical review of manuscripts by the Board of Directors of the National Bureau (resolution adopted June 1948, as revised 21 November 1949 and 20 April 1968) elation of the Directors to the Work and Publications of the National Bureau of Economic Research The object of the National Bureau of Economic Research is to ascertain and to present to the public important economic facts and their interpretation in a scientific and impartial manner The Board of Directors is charged with the responsibility of ensuring that the work of the National Bureau is carried on in strict conformity with this object The President of the National Bureau shall submit to the Board of Directors, or to its Executive Committee, for their formal adoption all specific proposals for research to be instituted No research report shall be published by the National Bureau until the President has sent each member of the Board a notice that a manuscript is recommended for publication and that in the President’s opinion it is suitable for publication in accordance with the principles of the National Bureau Such notification will include an abstract or summary of the manuscript’s content and a response form for use by those Directors who desire a copy of the manuscript for review Each manuscript shall contain a summary drawing attention to the nature and treatment of the problem studied, the character of the data and their utilization in the report, and the main conclusions reached For each manuscript so submitted, a special committee of the Directors (including Directors Emeriti) shall be appointed by majority agreement of the President and Vice Presidents (or by the Executive Committee in case of inability to decide on the part of the President and Vice Presidents), consisting of three Directors selected as nearly as may be one from each general division of the Board The names of the special manuscript committee shall be stated to each Director when notice of the proposed publication is submitted to him It shall be the duty of each member of the special manuscript committee to read the manuscript If each member of the manuscript committee signifies his approval within thirty days of the transmittal of the manuscript, the report may be published If at the end of that period any member of the manuscript committee withholds his approval, the President shall then notify each member of the Board, requesting approval or disapproval of publication, and thirty days additional shall be granted for this purpose The manuscript shall then not be published unless at least a majority of the entire Board who shall have voted on the proposal within the time fixed for the receipt of votes shall have approved No manuscript may be published, though approved by each member of the special manuscript committee, until forty-five days have elapsed from the transmittal of the report in manuscript form The interval is allowed for the receipt of any memorandum of dissent or reservation, together with a brief statement of his reasons, that any member may wish to express; and such memorandum of dissent or reservation shall be published with the manuscript if he so desires Publication does not, however, imply that each member of the Board has read the manuscript, or that either members of the Board in general or the special committee have passed on its validity in every detail Publications of the National Bureau issued for informational purposes concerning the work of the Bureau and its staff, or issued to inform the public of activities of Bureau staff, and volumes issued as a result of various conferences involving the National Bureau shall contain a specific disclaimer noting that such publication has not passed through the normal review procedures required in this resolution The Executive Committee of the Board is charged with review of all such publications from time to time to ensure that they not take on the character of formal research reports of the National Bureau, requiring formal Board approval Unless otherwise determined by the Board or exempted by the terms of paragraph 6, a copy of this resolution shall be printed in each National Bureau publication (Resolution adopted October 25, 1926, as revised through September 30, 1974) Contents Acknowledgments xi Introduction Michael P Dooley and Jeffrey A Frankel I T D Interest Rates and Exchange Rates in the Korean, Philippine, and Thai Exchange Rate Crises Dongchul Cho and Kenneth D West Comment: Robert Dekle Discussion Summary Interest Rate Defense against Speculative Attack as a Signal: A Primer Allan Drazen Comment: Robert P Flood Discussion Summary Does It Pay to Defend against a Speculative Attack? Barry Eichengreen and Andrew K Rose Comment: Richard Portes Discussion Summary 11 37 61 vii viii Contents II T P The International Lender of Last Resort: How Large Is Large Enough? Olivier Jeanne and Charles Wyplosz Comment: Olivier Blanchard Discussion Summary Rescue Packages and Output Losses Following Crises Michael P Dooley and Sujata Verma Comment: Andrew Powell Discussion Summary 89 125 Financial Restructuring in Banking and CorporateSector Crises: What Policies to Pursue? 147 Stijn Claessens, Daniela Klingebiel, and Luc Laeven Comment: Peter B Kenen Discussion Summary On the Fiscal Implications of Twin Crises A Craig Burnside, Martin Eichenbaum, and Sergio Rebelo Comment: Kenneth Kletzer Discussion Summary An Evaluation of Proposals to Reform the International Financial Architecture Morris Goldstein Comment: Andrew Berg Discussion Summary 187 225 III T I Recovery and Sustainability in East Asia Yung Chul Park and Jong-Wha Lee Comment: Richard Portes Discussion Summary 10 A Cure Worse Than the Disease? Currency Crises and the Output Costs of IMF-Supported Stabilization Programs Michael M Hutchison Comment: Gian Maria Milesi-Ferretti Discussion Summary 275 321 Contents 11 IMF and World Bank Structural Adjustment Programs and Poverty William Easterly Comment: Edwin M Truman Discussion Summary 12 Impacts of the Indonesian Economic Crisis: Price Changes and the Poor James Levinsohn, Steven Berry, and Jed Friedman Comment: Lant Pritchett Discussion Summary Contributors Author Index Subject Index ix 361 393 429 433 437 .. .Managing Currency Crises in Emerging Markets A National Bureau of Economic Research Conference Report Managing Currency Crises in Emerging Markets Edited by Michael P Dooley and Jeffrey A Frankel. .. avoid or minimize crises in emerging- market countries in the first place The corresponding volume is Preventing Currency Crises in Emerging Markets, edited by Sebastian Edwards and Jeffrey A Frankel. .. ( 3) and ( 1) to obtain ( 4) (1 Ϫ d )it ϭ Et stϩ1 Ϫ st ϩ udt Equations (2 ) and ( 4) are a two-equation system for the two variables it and st Upon substituting equation (2 ) into equation ( 4) and