The Possibility of financial crisis in Developing Countries under flexible exchange rate regimes : a multidimensional approach

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2012
Çolak, Mehmet Selman
Many economists and politicians have blamed fixed exchange rate regimes for several crises taking place in developing countries after the 1980s. According to them, since the beginning of the 2000s, widespread implementation of flexible exchange rate regimes and high international reserves have prevented developing countries from experiencing similar catastrophic experiences. This interpretation seems to be misleading. We believe that even flexible exchange rate regimes with high international reserves do not have a magic to prevent a financial crisis. Although flexible exchange rate regimes and high international reserves might have played some positive roles in the relatively calm period of 2001-2008; the main reason behind the calmness of this period is the fact that developing countries did not face a strong financial shock during this period. In the presence of “safe havens”, which implies existence of safe developed countries for financial capital to move into, flexible exchange rate regimes and the accumulated large reserves may not be adequate when a wave of financial shocks, as in the form of sudden stops and capital reversals, hit developing countries. Indeed, the absence of safe heavens and very low yields in developed countries eased the pressure on developing countries during the recent financial crisis of 2008-2009. If developed economies get their safe haven status back, developing countries might face new financial shocks. In this sense developing countries would experience new financial crises in this new period. We will elaborate on the possible conditions of these prospective financial crises in this thesis.
Citation Formats
M. S. Çolak, “ The Possibility of financial crisis in Developing Countries under flexible exchange rate regimes : a multidimensional approach,” M.S. - Master of Science, Middle East Technical University, 2012.