THE AFTERMATH OF A CURRENCY COLLAPSE:HOW DIFFERENT ARE EMERGING MARKETS?

In currency crises, unlike in orderly devaluations, the financial markets dominateevents. It is shown that currency collapses (crises followed by depreciations) have hada much greater adverse impact in emerging markets (defined as relatively highincomedeveloping countries exposed to international capital markets) than indeveloped countries. There is greater nominal and real depreciation, a substantialinflation shock, a much bigger output effect, and far greater import compression,whilst inflows of portfolio capital virtually cease. There is wide variation in the postcollapseexperience of emerging markets.