ABSTRACT
This chapter critically examines the origins, symptoms, and consequences of the last decade of financial crises, paying particular attention to the crises in Mexico (1994), Asia (1997-1998), Russia (1998) and Brazil (1998). The relationship of these crises to contemporaneous financial developments in the United States and Japan are mentioned as well, where a trail of hot money can be found leaving Japan, first moving into Asia and other emerging economies then through offshore banking centers into the United States. It argues for the necessity of effective financial regulation in attaining the potential allocative efficiency benefits of capital markets and concludes that a recent perceptible shift in IMF policy is promising. Adopting a schema best viewed as one that augments Hyman Minsky’s Financial Instability Hypothesis, this chapter highlights the role of endogenous credit, prudential safeguards, linkages and contagion through credit markets, as well as the tendency for destabilizing speculation in deregulated financial systems. The IMF response to the Asian crisis represents a marked change in policy as it recognizes explicitly the importance of public goods such as financial and social stability.
