ABSTRACT
A review of the country case studies in this book suggests that there is something to be gained from thinking in terms of two polar extremes of balance of payments crises. I shall refer to these as ‘old-style’ and ‘new-style’ crises. The old-style crisis originates in the current account, and is typically brought on by the emergence of relatively high inflation or adverse terms of trade shifts, which create a gap between the current account deficit and capital inflow. In such circumstances, given a pegged exchange rate and a reluctance on the part of governments to allow the money supply to fall and interest rates to rise, reserves decline continuously,1 eventually attracting the attention of both speculators and those with unhedged exchange rate risks; at this stage the crisis begins to involve the capital account as well. The decline in reserves then accelerates, eventually forcing a devaluation.2 If sufficiently large, this puts an end to the problem, providing that fiscal and monetary policies are adjusted as necessary in cases where they have been the initial source of disequilibrium. (The successful resolution of the payments disequilibrium may leave other problems in its wake, but experience seems to indicate that the feared consequences of devaluations usually turn out to have been greatly exaggerated.)
