Controlling Currency Mismatches In Emerging Markets

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In most of the currency crises of the 1990s, the largest output falls have occurred in those emerging economies with large currency mismatches, a phenomenon that occurs when assets and liabilities are denominated in different currencies such that net worth is sensitive to changes in the exchange rate. Currency mismatching makes crisis management much more difficult since it constrains the willingness of the monetary authority to reduce interest rates in a recession (for fear of initiating a large fall in the currency that would bring with it large-scale insolvencies). The mismatching also produces a "fear of floating" on the part of emerging economies, sometimes inducing them to make currency-regime choices that are not in their own long-term interest. Authors Morris Goldstein and Philip Turner summarize what is known about the origins of currency mismatching in emerging economies, discuss how best to define and measure currency mismatching, and review policy options for reducing the size of the problem.

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Morris Goldstein is the Dennis Weatherstone Senior Fellow at the Institute For International Economics. He has held several senior staff positions at the International Monetary Fund (1970-94), including Deputy Director of its Research Department (1987-94). He has written extensively on international economic policy and on international capital markets. He is author of Managed Floating Plus (2002), The Asian Financial Crisis: Causes, Cures, and Systemic Implications (1998), The Case for an International Banking Standard (1997), The Exchange Rate System and the IMF: A Modest Agenda (1995), coeditor of Private Capital Flows to Emerging Markets after the Mexican Crisis (1996), coauthor of Assessing Financial Vulnerability: An Early Warning System for Emerging Markets with Graciela Kaminsky and Carmen Reinhart (2000), and project director of Safeguarding Prosperity in a Global Financial System: The Future International Financial Architecture (1999) for the Council on Foreign Relations Task Force on the International Financial Architecture. Philip Turner is the head of the secretariat group in the monetary and economics department of the Bank for International Settlements (BIS). His research interests include financial stability in emerging markets, banking systems, and bank restructuring in the developing world. He was a member of the Financial Stability Forumx92;s Working Group on Capital Flows. Between 1976 and 1989, he held various positions, including head of division in the economics department of the Organization for Economic Cooperation and Development in Paris and visiting scholar at the Bank of Japanx92;s Institute for Monetary and Economic Studies (1985-86).