Capital in flows and Current Account Deficits : A Study of the Crisis in East Asia

Abstract

This paper attempts a macroeconomic analysis into the causes of the crisis by looking into two important features of the economies hit by the crisis, namely, capital inflows and current account deficits. The discussion on capital inflows, current account deficits and balance of payments crises, essentially involves two processes that generally work independently of each other. The first process involves the macroeconomic adjustment to inflows of foreign private capital and the consequent challenges in dealing with overheating and vulnerability. The second process includes the various mechanisms by which a country can correct a balance of payments problem arising out of persistent current account deficits. However, a conflict may arise between the two and the impact of the first process on macroeconomic variables could run at cross-purposes to the working of the second.