Novelties of Financial Crises in the 1990s and the Search for New Indicators

This paper argues, first, that, despite some similarities, financial crises in the 1990s have featured substantial differences between them: the ERM crisis of 1992-93 was mainly due to stringent monetary policies; the Mexican crisis of 1994-95 was associated to private overconsumption; and the East Asian crises of 1997-99 were basically the result of private overinvestment. Therefore, as crises do not seem to present strong regularities over time, the task of trying to predict them on the basis of past developments is surely deemed to failure. As crises might be simply unpredictable, specialists should refrain from creating and developing predictors and focus instead on simpler early-warning indicators. Second, the paper reviews the main body of literature on leading indicators of crises and it suggests that the bulk of these conventional indicators do not seem to be appropriate to the East Asian episodes. In order to create a new set of early-warning indicators, economists should focus on non-conventional deficiencies, such as those related to financial fragility associated with financial deregulation and with capital inflows, to a declining efficiency of investment, and to a high short-term external debt (especially as a proportion of foreign exchange reserves).