The EMS Crisis in Retrospect

This Paper reconsiders the 1992/3 crisis in the European Monetary System in light of its emerging market successors. That episode was a predecessor of the Mexican and Asian crises in the sense that both capital movements and domestic financial fragility played important roles. The output effects of this currency crisis resemble those of the typical emerging market crisis as much as they do the more moderate effects of the typical industrial-country crisis, reflecting the influence of the aforementioned capital mobility and financial fragility. Leading indicator models, constructed using data from the Tequila and the Asian flu are shown to do a surprisingly good job at backcasting which European countries suffered currency instability in 1992/3, although these models also point to what was distinctive about the European case.