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Mr. Richard Hemming, Mr. Axel Schimmelpfennig, and Mr. Michael Kell

Abstract

Fiscal problems have long been considered a central feature of financial--that is, currency, debt, and banking--crises. This paper addresses four questions: What are the fiscal causes of crises? Which fiscal vulnerability indicators help to predict crises? Can fiscal variables explain the severity of crises? And what are the fiscal consequences of crises? Its findings are based on statistical analysis of a large data set of fiscal variables for 29 emerging market economies over 1970-2000 and detailed case studies of 11 emerging market crises during the 1990s that focus on structural and institutional dimensions of fiscal vulnerability.

Mr. Richard Hemming, Mr. Axel Schimmelpfennig, and Mr. Michael Kell

Abstract

Fiscal problems have long been considered a central feature of financial (i.e., currency, debt, and banking) crises. However, fiscal problems received less attention at the time of the Asian crisis, because financial and corporate sector vulnerabilities were seen to be more important than fiscal vulnerability.1 But the recent crises in Argentina and Turkey illustrate the continuing importance of fiscal problems in precipitating crises. Moreover, whatever their cause, financial crises always have important fiscal dimensions.

Mr. Richard Hemming, Mr. Axel Schimmelpfennig, and Mr. Michael Kell

Abstract

Financial crises in emerging market economies have been the subject of considerable analysis. This section draws on work to date to provide essential background for the subsequent sections.

Mr. Richard Hemming, Mr. Axel Schimmelpfennig, and Mr. Michael Kell

Abstract

To examine the empirical relationships between fiscal variables and emerging market crises, a large fiscal dataset was constructed. This section describes the dataset and an event study analysis of fiscal variables.

International Monetary Fund. External Relations Dept.

The Fifty-Second Annual Meetings of the IMF and the World Bank concluded with a consensus that global opening and integration offer the only path to worldwide prosperity and that strong IMF surveillance over the policies of its 181 members remains essential. The meetings achieved important and concrete results for the IMF, notably an endorsement by ministers and governors of the IMF’s role in promoting the liberalization of capital flows, agreement on a 45 percent increase in IMF quotas, and agreement on an “equity” SDR allocation that doubles SDRs allocated to date.

Mr. Richard Hemming, Mr. Axel Schimmelpfennig, and Mr. Michael Kell

Abstract

This section summarizes the results of various statistical and econometric analyses of the dataset described in the previous section. First, the extent to which fiscal variables can help to predict crises is examined using two popular EWS models. The second part investigates whether fiscal variables can help to explain the severity of currency crises. Further explanation of the methodologies and detailed results are given in Appendix IV.

International Monetary Fund
In discussing the June 2014 paper, Executive Directors broadly supported staff’s proposal to introduce more flexibility into the Fund’s exceptional access framework to reduce unnecessary costs for the member, its creditors, and the overall system. Directors’ views varied on staff’s proposal to eliminate the systemic exemption introduced in 2010. Many Directors favored removing the exemption but some others preferred to retain it and requested staff to consult further with relevant stakeholders on possible approaches to managing contagion. This paper offers specific proposals on how the Fund’s policy framework could be changed, presents staff’s analysis on the specific issue of managing contagion, and addresses some implementation issues. No Board decision is proposed at this stage. The paper is consistent with the Executive Board’s May 2013 endorsement of a work program focused on strengthening market-based approaches to resolving sovereign debt crises.
International Monetary Fund
The COVID-19 pandemic has inflicted an unprecedented shock on the global economy and created an enormous demand for Fund resources. To accelerate processing and approval of members’ requests in such circumstances, the paper proposes measures to expedite Board consideration and approval of requests for purchases and/or disbursements under the Rapid Financing Instrument and/or the Rapid Credit Facility, respectively, completion of reviews and requests for changes in access in existing arrangements, and requests for assistance under the Catastrophe Containment and Relief Trust (CCRT), by shortening the circulation period for Board documents. The paper also proposes extending the use of the shortened circulation period to selected Article IV consultations necessary for use of Fund resources during a global pandemic. Management will also streamline internal procedures to accelerate program processing and reduce the burden on the Fund’s administrative capacity, and will seek the support of creditors to expedite the processing of financial transactions under COVID-19 emergency financing.
Mr. Richard Hemming, Mr. Axel Schimmelpfennig, and Mr. Michael Kell

Abstract

This section reports the conclusions from case studies of 11 financial crises in emerging market economies in the 1990s. In chronological order, these are Mexico (1994–95), Argentina (1995), Bulgaria (1996–97), the Czech Republic (1997), Thailand (1997), Korea (1997), Pakistan (1998–99), Russia (1998), Ukraine (1998–2000), Brazil (1998–99), and Ecuador (1999). The case studies can be found in Appendix V. These obviously do not cover all emerging market financial crises of recent years, neither are they a random sample. Rather, the cases have been selected to cover a range of different types of financial crisis, some of which have already been extensively analyzed, but others of which are less well known. Each case study covers the background to the crisis; a description of the way in which the crisis manifested itself—currency depreciation, banking system collapse, sovereign debt restructuring or default, the impact on output and inflation, and the immediate policy responses; the causes of the crisis; the evolution of various fiscal vulnerability indicators before, during, and after the crisis; and, finally, the fiscal impact of the crisis and the response of macrofiscal and structural fiscal policies. The main conclusions are organized under three headings: the fiscal causes of crises, fiscal indicators, and fiscal consequences of crises.

Mr. Richard Hemming, Mr. Axel Schimmelpfennig, and Mr. Michael Kell

Abstract

A review of the theoretical literature suggests three main ways in which fiscal policy can cause a financial crisis. These are through an overly expansionary fiscal stance, leading to a lending and/or consumption boom; through concerns about sustainability, which could be triggered by news about contingent liabilities or by a shift in expectations about the government’s commitment to fiscal adjustment; and through the maturity and currency structure of public debt, which can be critical to perceptions of government liquidity, and hence increase vulnerability to self-fulfilling crises.