Flows and runs: capital and speculation in emerging market economies

Abstract

Private capital flow to emerging market economies increased substantially during the 1990s. Concurrently three major regional currency crises took place during this period, namely, the European crisis of 1992–93,the Latin American crisis of 1994–95 and the Asian crisis of 1997–98. The latter broke out only two years after the former, which should serve to remind us that there will be more in the future. Two of the three waves of regional currency crises took place in emerging market economies and speculative runs played a discernible role in all three. Issues related to financial flows, currency debacles and the role played by speculators have become important to both policymakers and the academic community. Capital inflows led to instability in the currency markets, therefore, this paper examines capital flows to emerging market economies, exchange rate destabilisation and the role played by speculative runs. The paper also explores possible defence strategies to mitigate the effects of speculative attacks.