Rethinking vulnerability to currency crises: Comments on Athukorala and Warr

This paper re-examines Athukorala and Warr’s ex post investigation of several Asian
countries’ vulnerability to balance of payments crises. It argues that their focus on
‘mobile capital’ is flawed in two important aspects. It also questions their ideas about
exchange rate ‘overvaluation’, and argues that their case that this is a meaningful
indicator of vulnerability is unconvincing. The finding that rapid finance sector
growth seems to have been a precursor to crisis is followed up with a discussion of
the policy implications, which was largely absent from the original article. The paper
goes on to question the logic of the authors’ finding that the crises were not caused
by irrational private sector behaviour. Finally, it suggests that government policy
often implicitly assumes the prevalence of such behaviour, and that vulnerability to
crises results from policy that prevents continuous adjustment of the real exchange
rate to changing circumstances.