The impact of capital mobility on stability and growth is one of the least understood and the most contentious modern day issues in economics., In his book, The Capital Flows and Crises, Barry Eichengreen provides a comprehensive theoretical and practical work involving currency crises. He provides analysis of the currency crises from a sharp historical and institutional perspective. He is convinced that international financial liberalization, similar to all other forms of economic liberalization, can affect the rate of economic growth and resource allocation efficiency positively.  He agrees with the fact that historical and recent evidence reveal undeniable relationship between capital mobility and crises. Such relationship is, however, firm in countries where domestic institutions are not strong, and policy reforms and other forms of capital account liberalization are inadequate. The book comprises four sections: the historical background, summary of the empirical and theoretical work, case studies, and recommendations.

The first two chapters of the book comprise the historical background that mainly reviews the common understanding of the causes and impact of currency crisis, and how such understandings changed over the twentieth century. In this section, he offers an all-around perspective of the four main booms, i.e. 1880-1913; the 1920's; the Mexican crisis of 1982; and the 1990's and their subsequent collapse. The second part of the book reviews the causes and impacts of currency crisis and the impacts of capital account liberalization. It provides investigations and empirical works for comparison with previously published work. In the third section of the book, Eichengreen discusses the Mexico 1994 and Argentina 1890 booms and their subsequent collapse and concludes that the difference between the two was due to institutional conditions. He then analyses the 1992 European Monetary System (EMS) crisis, an example of currency crisis affecting diversified and developed economies. Finally, he analyses the Asian crisis of 1998 and its effects affected Japan, Thailand, Russia and Latin America. In the last portion of the book, he prescribes policies that would be useful in dealing with the currency crisis.

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In his book, Eichengreen suggests that the problems leading to a currency crisis emanate from what he refers to as The Messy Middle, meaning currency arrangements lying between free floats and hard pegs. Developing countries that experienced a hard pegged currency system face this condition. As these countries start developing, they experience the crisis before reaching the free floats currency system that was experienced by the developed countries. Eichengreen then gives guidelines that would assist developing countries in attaining a smooth transition from the hard pegged system to free floats system. These guidelines would shield the country from undergoing the currency crisis. The guidelines include opening of capital accounts only after liberalization and decontrol of financial markets. Secondly, countries should first liberalize their foreign direct investment; third, the liberalization of bonds and stocks markets should take place; fourth, the reliance on market instruments that are friendly for management of capital accounts is needed; fifth, aligning domestic policies and institutions to the capital market regime is required; and lastly, holding reserves as an insurance against crisis is not desired, since this may cause such crisis in some situations. The author, however, believes that the rules would be more effective and useful after the strengthening of international financial institutions and building markets that would provide additional price transparency and signals.


Eichengreen starts his exploration by analyzing the connection between the capital flows and crisis by analyzing the financial crisis of the 1990s and the Asian economic crisis. This led to profound disagreement between him and other economist with regard to capital market deregulation and capital mobility. On one side, most economists view international capital mobility as a means for development and liberalization of domestic economies, which should result in an increased efficiency in flow of funds that, in turn, promotes economic development. Other economists, on the other side, observed that there is no evidence that liberalization of capital account promoted economic growth and development in emerging and developing markets. In addition, the analysis of 1992 European Monetary System (EMS) crisis reveals that even developed economies are affected by the currency crisis. These economists have been influential in criticizing Eichengreen.


Barry Eichengreen is a Professor of Political Science and a Professor of Economics at the University of California. This book offers an understanding of the connection between capital accounts and currency crisis. He explains that the currency crisis mostly happens when developing countries start shifting their economy from a hard pegged system to a free float system as the one in the developed countries. He also gives suggestions on how such countries can avoid currency crisis by adopting the propositions that he offers. Barry analyses the various past economic booms and their subsequent collapses. He tries to explain the political, commercial, and economic aspects that led to such collapses. Moreover, he explains the connection between capital accounts and the collapse of some economic booms.

Some economists have been critical about the work of Barry Eichengreen, claiming that there is no evident connection between capital accounts and economic development. However, he holds the support of majority of the economists who state that capital accounts provides a means for efficient resource allocation, which, in turn, triggers economic development. Barry Eichengreen enjoys the support and endorsement of fellow economists and professors of economic in various universities, who hold that research on currency cries has been on the rise over the years, and Barry Eichengreen has been in the lead.

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