International Tax and Public Finance

, Volume 6, Issue 4, pp 459–472

Balance Sheets, the Transfer Problem, and Financial Crises

  • Paul Krugman

DOI: 10.1023/A:1008741113074

Cite this article as:
Krugman, P. International Tax and Public Finance (1999) 6: 459. doi:10.1023/A:1008741113074


In a world of high capital mobility, the threat of speculative attack becomes a central issue of macroeconomicpolicy. While “first-generation” and “second-generation” models of speculative attacks both have considerablerelevance to particular financial crises of the 1990s, a “third-generation” model is needed to make sense of thenumber and nature of the emerging market crises of 1997-98. Most of the recent attempts to produce such amodel have argued that the core of the problem lies in the banking system. This paper sketches another candidatefor third-generation crisis modeling—one that emphasizes two facts that have been omitted from formal modelsto date: the role of companies' balance sheets in determining their ability to invest, and that of capital flows inaffecting the real exchange rate.

currency crises balance sheets capital flows 

Copyright information

© Kluwer Academic Publishers 1999

Authors and Affiliations

  • Paul Krugman
    • 1
  1. 1.MITDepartment of EconomicsCambridge

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