【正文】 e value of the domestic currencies. ? The loans were conditional on increased interest rates (reduced money supply growth), reduced budget deficits, and reforms in banking regulation and bankruptcy laws. ? Malaysia instead imposed financial capital controls so that it could increase its money supply (and lower interest rates), increase government purchases, and still try to maintain the value of the ringgit. 2252 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. East Asian Financial Crises (cont.) ? Due to decreased consumption and investment that occurred with decreased output, ine and employment, imports fell and the current account increased after 1997. 2253 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Russia’s Financial Crisis ? After liberalization in 1991, Russia’s economic laws were weakly enforced or nonexistent. ? There was weak enforcement of banking regulations, tax laws, property rights, loan contracts and bankruptcy laws. ? Financial markets were not well established. ? Corruption and crime became growing problems. ? Because of a lack of tax revenue, the government financed spending by seignoirage. ? Due to unsustainable seignoirage, interest rates rose on government debt to reflect high inflation and the risk of default. 2254 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Russia’s Financial Crisis (cont.) ? The IMF offered loans of foreign reserves to try to support the fixed exchange rate conditional on reforms. ? But in 1998, Russia devalued the ruble and defaulted on its debt and froze financial capital flows. ? Without international financial capital for investment, output fell in 1998 but recovered thereafter, partially helped by rising oil prices. ? Inflation rose in 1998 and 1999 but fell thereafter. 2255 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Russia’s real output growth and inflation, 19912022 1991 1992 1993 1994 1995 1996 1997 1998 1999 20222022 Real output growth % % % % % % % % % % Inflation rate % % % % % % % % % % Source: IMF, World Economic Outlook Russia’s Financial Crisis (cont.) 2256 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Lessons of Crises 1. Fixing the exchange rate has risks: governments desire to fix exchange rates to provide stability in the export and import sectors, but the price to pay may be high interest rates or high unemployment. ? High inflation (caused by government deficits or increases in the money supply) or a drop in demand for domestic exports leads to an overvalued currency and pressure for devaluation. ? Given pressure for devaluation, mitment to a fixed exchange rate usually means high interest rates (a reduction in the money supply) and a reduction in domestic prices. 2257 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Lessons of Crises (cont.) ? Prices are reduced through a reduction in government deficits, leading to a reduction in aggregate demand, output and employment. ? A fixed currency may encourage banks and firms to borrow in foreign currencies, but a devaluation will cause an increase in the burden of this debt and may lead to a banking crisis and bankruptcy. ? Commitment a fixed exchange rate can cause a financial crisis to worsen: high interest rates make loans for banks and firms harder to repay, and the central bank can not freely print money to give to troubled banks (can not act as a lender of last resort). 2258 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Lessons of Crises (cont.) 2. Weak enforcement of financial regulations can lead to risky investments and a banking crisis when a currency crisis erupts or when a fall in output, ine and employment occurs. 3. Liberalizing financial capital flows without implementing sound financial regulations can lead to financial capital flight when risky loans or other risky assets lose value during a recession. 2259 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Lessons of Crises (cont.) 4. The importance of expectations: even healthy economies are vulnerable to crises when expectations change. ? Expectations about an economy often change when other economies suffer from adverse events. ? International crises may result from contagion: an adverse event in one country leads to a similar event in other countries. 2260 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Potential Reforms: Policy Tradeoffs ? Countries face tradeoffs when trying to achieve the following goals: ? exchange rate stability ? financial capital mobility ? autonomous moary policy devoted to domestic goals ? Generally, countries can attain only 2 of the 3 goals, and as financial capital has bee more mobile, maintaining a fixed exchange with an autonomous moary policy has been difficult. 2261 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Potential Reforms: Policy Tradeoffs (cont.) 2262 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Potential Reforms Preventative measures: 1. Better monitoring and more transparency: more information for the public allows investors to make sound financial decisions in good and bad times 2. Stronger enforcement of financial regulations: reduces moral hazard 3. Deposit insurance and reserve requirements 4. Increased equity finance relative to debt finance 5. Increased credit for troubled banks through the central bank or the IMF? 2263 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Potential Reforms (cont.) Reforms for after a crisis occurs: 1. Bankruptcy procedures for default on sovereign debt and improved bankruptcy law for private sector debt. 2. A bigger or smaller role for the IMF as a lender of la