Currency Mismatch: Dilemmas and Countermeasures for Emerging Market Economies

Author: (USA) Morris Goldstein
Publisher:
Publish Date: 2005-10-01
Features: A massive currency mismatch—where the valuation currencies of assets and liabilities do not align—existed in most currency crises that occurred in the 1990s. In such situations, a company's net worth is highly vulnerable to exchange rate fluctuations, resulting in severe output losses for emerging market economies. Moreover, the presence of currency mismatches made monetary authorities reluctant to stimulate economic recovery through measures like lowering interest rates during recessions (as this could lead to further significant declines in exchange rates, thereby exacerbating currency mismatch losses). This created numerous difficulties in crisis management for emerging market economies. Additionally, currency mismatches also made emerging market economies susceptible to "floatation phobia," as fear of exchange rate volatility exposing and intensifying currency mismatch risks led these countries to adopt exchange rate regimes in practice that were not in their long-term interests. Morris Goldstein and Philip Turner review and analyze existing theories on crises in this book, provide a detailed discussion on how to effectively define and measure the extent of currency mismatches, and offer policy recommendations on how to control currency mismatches.