Emerging market financial crises are characterized by an abrupt and significant shift from net capital inflow to net capital outflow from one year to the next. By this standard, we find 10 cases of significant financial crisis among the middle-income developing countries in the past four years: Turkey 1994, Venezuela 1994, Argentina 1995, Mexico 1994–95, Indonesia 1997–98, Korea 1997–98, Malaysia 1997–98, Philippines 1997–98, Thailand 1997–98, and Russia 1998.1 It is the contention of this paper that such crises typically reflect a three-stage process that hits a developing country engaged in large-scale international borrowing.2 In the first stage, the exchange rate becomes overvalued as a result of internal or external macroeconomic events. In the second stage, the exchange rate is defended, but at the cost of a substantial drain of foreign exchange reserves held by the Central Bank. In the third stage, the depletion of reserves, usually in combination with a devaluation, triggers a panicked outflow by foreign creditors holding short-term claims. The trigger of panic, in most cases, is the devaluation itself, resulting from the exhaustion of reserves. The panicked outflow of short-term creditors leads to macroeconomic overshooting, characterized by sharp economic downturn, typically followed by a nearly equally sharp recovery. Various dimensions of the macroeconomy are involved in this overshooting: real GDP, the real exchange rate, real interest rates, net capital flows, and stock market valuations.