A Capital Idea? Reconsidering a Financial Quick Fix

Massive capital flows have been at the heart of every major currency crisis in the 1990s. Whether Mexico in 1994, Thailand in 1997, Russia in 1998, or Brazil in 1999, the stories are depressingly similar. High domestic interest rates, perceived stability stemming from rigid exchange rates, and apparently rosy economic prospects all attracted foreign funds into these emerging markets, lifting stock prices and helping finance bloated current account deficits. When these funds eventually trickled to a halt or reversed direction, significant corrections in macroeconomic policies became necessary. But governments often watered down or delayed reform, which increased investor uncertainty and nervousness over risk. As