September 29, 1998

The crisis in the emerging markets has shown--just as the Latin American crisis of 1994 did before it-- that a nations monetary policy and credit system determine its inflation potential, the susceptibility of its currency to speculative attacks, and the costs that an attack can inflict on the economy. More often than not the origin of the crisis can be traced to a declining real exchange rate accompanied by a capital outflow. The falling real exchange rate results from an adjustment process that equilibrates the countrys rate of return with those of the rest of the world.

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