The Wake of Crises and Devaluations

The preceding sections have predominantly focused on the antecedents of financial crises. Namely, the emphasis has been on the ability of a variety of indicators, including the credit ratings, to anticipate crises and characterize the extent to which a country is vulnerable. An application of the signals methodology to recent data also offered some insights as to where currency and banking sector problems may be brewing. In this section, we begin with the premise that, whether anticipated or not, financial crises occur and, once they do, policymakers and market participants become concerned about their consequences for economic activity. In light of Asia’s recent woes, there is much speculation as to how long it will take those economies to recover from such destabilizing shocks and what the consequences for inflation over the near- and medium-term will be. In what follows, we review the historical experience in the aftermath of currency and banking crises. The emphasis is on assessing the economy’s speed and capacity to return to “normal.”