Essay of Monetary Crises Theory

Recently, Federal Reserve announced to stop the QE project and this action represents the beginning of recovery of American economy. As the expansionary monetary policy has transited to relative tight monetary policy, the Federal Reserve aimed at raising interest rate and attract dollar to flow back to America. Since the U.S. dollar is also an international currency and charge unit of many commodities, it plays an essential role in international trading and investment. Many people worry about the inverse flow of dollars would form a huge impact on the monetary system of most emerging markets, even cause disastrous regional crises just like Latin America debt crisis of 1980s and Southeast Asian financial crisis of 1993. Especially, they concern more about China who have a big scale economy in emerging markets.

Based on the analysis about Latin America debt crisis, Tequila crisis and Southeast Asian crisis, the crises occurred in emerging markets have some characteristics.

First, most governments of emerging markets have conduct aggregate fiscal policy which featured by a high percentage of deficit in government’s budget and borrow great amount of debt from foreign investors or institutions. The main motivation of economic growth relies on foreign investment and investment supported by foreign debts. Those debts are concentrated on banking department and enterprises. Besides, because the market reform and lateralization of financial system were completed in a hurry and lacked of regulation on capital, short but large foreign capital flow in domestic market. Especially, the real estate market, stock market and bond market which provide fast rate returns become the focuses of those capitals. Meanwhile, banks and enterprises get promise from government that the risks are covered by government. The promise motivates them to borrow large scale of debt and form the potential deficit of government. The moral risk exists in financial system augments bubble economy....