Capital inflows, credit booms, and macroeconomic vulnerability: the cross-country experience
The turbulence in financial markets is Southeast Asia in 1997-98 and the crisis in Mexico in 1994-95 have renewed interest among policymarkers in the issues of capital account liberalization and financial sector reform. In all the East Asian cases and in Mexico, as well as in many other earlier episodes such as that of Chile in the late 1970s, countries that saw a rapid growth in bank credit typically experienced a financial crisis later on. Bank lending booms in these emerging market economies, often financed by a surge in capital inflows, led to everborrowing and asset price inflation, exacerbating financial fragility and macroeconomic vulnerability. This pattern has led several authors to argue in favor of imposing capital controls to avoid the excesses in financial markets that can lead to distress and crisis.