J. Bradford DeLong
One important thing missing from the syllabus of intermediate macroeconomics courses has been a clear, theoretically coherent, and comprehensible (to intermediate macroeconomics students) explanation of the international financial crises of the 1990s. Start with the collapse of confidence on the part of international currency speculators in the long-run values of the Mexican peso, the baht, the won, the ringit, the rupiah, the Brazilian real, the Argentinian peso, and the Turkish lira. What were the origins of the crisis? Why did governments and central banks afflicted by crisis find themselves forced to let their exchange rates rise--to let the value of their domestic currency rise? Why did they find themselves forced to raise interest rates? Why were they unable to keep output and employment from falling? Why were they so anxious to borrow money from the IMF during the crisis? And what was the rationale for the policy changes the IMF then demanded from crisis-afflicted countries before it would provide them with emergency loan support?
The standard models taught in intermediate macro--flexible-price full-employment, IS-LM, Mundell-Fleming--are of absolutely no help.
So I have taken a crack at writing down such an intermediate macro-level discussion of the developing world international financial crises of the 1990s. It uses an open-economy IS-curve model with an investment function that depends both on the real interest rate and the degree of currency-mismatch and depreciation-driven financial crisis to explain these crises at an intermediate macro level.
Unfortunately, I don't think that I have succeeded. It is too long (4000 words). It is too heavy on the algebra: it fails to achieve that balance between verbal description of economic forces, visual diagrams, and algebraic equations necessary for intermediate macro-level discussions to be both comprehensible and comprehensive. And it does not have enough "hooks" into the actual events of the crises of the 1990s: it is far too abstract.
If anyone would like to take a whack at revising it to improve the document, I would be very grateful. The Microsoft Word version of the file can be downloaded here.
Readings About International Financial Crises:
- Rudi Dornbusch's "Primer on Emerging Market Crises"; clear, brilliant, and witty too...
- Morris Goldstein's "IMF Structural Programs"; the best thing I have seen on the IMF's "structural adjustment" programs...
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