PREM Notes

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This note series is intended to summarize good practices and key policy findings on poverty reduction and economic management (PREM) topics.

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    Currency Crises and Government Finances
    (World Bank, Washington, DC, 2002-05) Burnside, Craig
    Fiscal policy plays a big role in currency crises - before, and after they occur. Thus policymakers should not underestimate the importance of fiscal policy: a) the realization of large contingent liabilities can quickly, and dramatically alter government finances, leading to a currency crisis; b) the effects of a currency crisis on government finances depend on the structure of government revenue, spending, and debt; c) the fiscal policies adopted in response to a crisis, influence economic outcomes, especially inflation, and depreciation. The note reviews the traditional models of currency crises, explained as a consequence of unsustainable fiscal policy, and how debt is accumulated, how currency crisis then develops, and why does fiscal policy matter. Focusing on bank bailouts, it is argued that traditional models of currency crises are applicable to emerging markets, suggesting that deficits after the East Asia financial crises could have been anticipated given the region's deteriorating banking systems, but that economic outcomes largely depend on the mix of financing.
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    What Effect Will East Asia's Crisis Have on Developing Countries?
    (World Bank, Washington, DC, 1998-03) Dadush, Uri ; Lynn, Robert ; Riordan, Mick ; Dasgupta, Dipak ; Johannes, Ronald
    This note summarizes recent projections on the longer-term effects of the East Asia's financial crisis, and the significant effect already felt in developing countries. Five main points are examined, as follows: 1) though trade will drive the recovery, adjustment will be deep and protracted, in the region, mostly in Indonesia, Korea, Malaysia, the Philippines and Thailand; 2) developing countries will be mostly affected, since reductions in growth are estimated to double due to high trade multipliers, terms of trade movements, as well as tight monetary and fiscal policies in those countries relying on private capital flows; 3) because of lower oil prices, oil importing countries stand to lose the most, with Latin America, the Middle East, and North and Sub-Saharan Africa the hardest hit; 4) the crisis will bear a significant effect on the world economy, though not nearly as damaging as the 1973 and 1978 oil shocks; and 5) increased risks, such as a spillover or cutoff in credit, for developing countries are estimated, though predicted to be manageable.