ABSTRACT
In the last decade, many emerging market economies experienced a currency and/or financial/banking crisis (Mexico, Thailand, Indonesia, South Korea, Russia, Brazil, Ecuador, Turkey and Argentina, to name the main ones). In each one of these crises, in addition to sharp falls in asset prices and economic activity, the crisis country faced a large external (and sometimes domestic) financing gap that was the result of a combination of large pre-crisis current account deficits and large reversals of capital flows (“sudden stops”, “capital inflows reversals”, short-term government debt rollover crises and/or liquidity runs on the banks’ domestic or cross border short-term liabilities). These facts support the new view that the financial crises in the past decade have been mostly “capital account” crises (or “sudden stop” crises) having to do with balance sheet stock imbalances (maturity, currency and capital structure mismatches) rather than just traditional flow imbalances.
