In the last five years, the global economy has experienced severe bouts of
financial instability that have had devastating impacts on crisis countries
. Some examples of the impact on GDP are given in Table 1. In Mexico, GDP g
rowth fell from above 4 percent in 1994 before the crisis to -6 percent in
1995. In Thailand, Malaysia, South Korea and Indonesia, GDP growth fell fro
m above 5 percent in 1996 before the crisis to below -5 percent in 1998. Th
ese swings of over 10 percent in rates of GDP growth are of the same order
of magnitude as what occurred in the United States during the Great Depress
ion.
Two of the key questions facing policymakers today are how to reduce the ri
sk of global financial instability and how to cope with it when it occurs.
This paper starts by defining financial instability and then showing how it
harms economic activity. It then uses this framework to describe what happ
ened during the recent financial crises in Mexico and east Asia. The paper
ends by raising several key policy issues not coincidentally, these issues
are addressed in the remaining papers in the symposium.