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Asian Crises: Theory, Evidence, Warning-Signals

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  • Jerome L. Stein
  • Guay C. Lim

Abstract

In July 1997, the economies of East Asia became embroiled in one of the worst financial crises of the postwar period. Yet, prior to the crisis, these economies were seen as models of economic growth experiencing sustained growth rates that exceeded those earlier thought unattainable. Why did the market not anticipate the crises? To this end, we review the Asian financial crisis from two related perspectives - whether the crisis was precipitated by a failure of the real exchange rate to be aligned with its fundamental determinants and/or whether the crisis was precipitated by a divergence of the foreign debt from its optimal path. The first perspective is based on a coherent theory of the equilibrium real exchange rate - the NATREX model - that shows how “misalignments” lead to currency crises. The second perspective is based on a model of optimal foreign debt ratio - derived from stochastic optimal control - which shows why “divergences” lead to debt crises. The important point here is that these models suggest important variables which may serve as warning signals to predict crises.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1159.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1159

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Keywords: Asian crises; optimal debt; equilibrium exchange rates; NATREX; stochastic optimal control; warning signals of crises; exchange rate misalignment;

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References

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  1. Jerome L. Stein & Giovanna Paladino, 2001. "Country Default Risk: An Empirical Assessment," Working Papers 2001-08, Brown University, Department of Economics.
  2. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. V�gh, 2003. "The Unholy Trinity of Financial Contagion," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 17(4), pages 51-74, Fall.
  3. Carlos O. Arteta, 2003. "Are financially dollarized countries more prone to costly crises?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 763, Board of Governors of the Federal Reserve System (U.S.).
  4. Jerome L. Stein & Guay C. Lim, 2002. "Introduction to "Exchange Rates in Europe and Australasia: Fundamental Determinants, Adjustments and Policy Implications"," Australian Economic Papers, Wiley Blackwell, Wiley Blackwell, vol. 41(4), pages 329-341, December.
  5. Ramkishen S. Rajan & Reza Siregar, 2002. "Choice of Exchange Rate Regime: Currency Board (Hong Kong) or Monitoring Band (Singapore)?," Australian Economic Papers, Wiley Blackwell, Wiley Blackwell, vol. 41(4), pages 538-556, December.
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Cited by:
  1. n.a.m, Naseem & m.s, Hamizah, 2013. "Exchange Rate Misalignment and Economic Growth: Recent Evidence in Malaysia," MPRA Paper 52447, University Library of Munich, Germany.

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