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The Falsification of Four Popular Hypotheses about International Financial Behavior during the Asian Crisis

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Author Info

  • Thomas D. Willett

    (Claremont McKenna College and Claremont Graduate University)

  • Aida Budiman

    (Claremont Graduate University)

  • Arthur Denzau

    (Claremont Graduate University)

  • Gab-Je Jo

    (Claremont Graduate University)

  • Cesar Ramos

    (Claremont Graduate University)

  • John Thomas

    (Claremont Graduate University)

Abstract

Various claims have been made about the causes of the Asian crisis and its spread. Here, we use data on the behavior of capital flows during the crisis to test the strong forms of four such hypotheses, including the dominant role of portfolio investors and hedge funds in initiating and spreading the crisis; moral hazard; and, finally, the role of Japanese banks in spreading the trouble to countries in which they were the largest source of funds. All are falsified as monocausal explanations. For example, portfolio investments that could not have been subject to substantial moral hazard continued to flow into Asia until very shortly before the crisis. Likewise, contrary to common expectations banks were a much larger source of capital outflows during the crisis than were portfolio investors. While falsified in their strongest forms, several of these hypotheses in less strong form should play a role in a more nuanced analysis. It is time to move past simple single-factor approaches in order to produce a more complete, synthetic explanation of this episode.

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Bibliographic Info

Paper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 2001-06.

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Date of creation: May 2001
Date of revision: Sep 2001
Handle: RePEc:clm:clmeco:2001-06

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  1. Reinhart, Carmen & Kaminsky, Graciela, 1998. "On crises, contagion, and confusion," MPRA Paper 13709, University Library of Munich, Germany.
  2. Taimur Baig & Ilan Goldfajn, 2000. "The Russian Default and the Contagion to Brazil," IMF Working Papers 00/160, International Monetary Fund.
  3. Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
  4. Takatoshi Ito, 2000. "Capital Flows in Asia," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 255-296 National Bureau of Economic Research, Inc.
  5. Classens, S. & Dooley, M.P. & Warner, A., 1995. "Portfolio Capital Flows: Hot or Cold," Papers 501, Harvard - Institute for International Development.
  6. Sunil Sharma & Sushil Bikhchandani, 2000. "Herd Behavior in Financial Markets: A Review," IMF Working Papers 00/48, International Monetary Fund.
  7. Michael P. Dooley & Inseok Shin, 1999. "Private inflows when crises are anticipated: a case study of Korea," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  8. Sarno, Lucio & Taylor, Mark P., 1999. "Hot money, accounting labels and the permanence of capital flows to developing countries: an empirical investigation," Journal of Development Economics, Elsevier, vol. 59(2), pages 337-364, August.
  9. International Monetary Fund, 2000. "Spillovers Through Banking Centers," IMF Working Papers 00/88, International Monetary Fund.
  10. Rene M. Stulz, 2000. "U.S. Banks, Crises, and Bailouts: From Mexico to LTCM," NBER Working Papers 7529, National Bureau of Economic Research, Inc.
  11. Anne Jansen & Donald J. Mathieson & Barry J. Eichengreen & Laura E. Kodres & Bankim Chadha & Sunil Sharma, 1998. "Hedge Funds and Financial Market Dynamics," IMF Occasional Papers 166, International Monetary Fund.
  12. Alberto Gabriele & Korkut Baratav & Ashok Parikh, 2000. "Instability and Volatility of Capital Flows to Developing Countries," The World Economy, Wiley Blackwell, vol. 23(8), pages 1031-1056, 08.
  13. Michael P. Dooley, 1997. "A Model of Crises in Emerging Markets," NBER Working Papers 6300, National Bureau of Economic Research, Inc.
  14. Steven Phillips & Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
  15. Eduardo Fernández-Arias & Ricardo Hausmann, 2000. "Is FDI a Safer Form of Financing?," IDB Publications 6465, Inter-American Development Bank.
  16. repec:fth:inadeb:416 is not listed on IDEAS
  17. Eric van Wincoop & Kei-Mu Yi, 2000. "Asia crisis postmortem: where did the money go and did the United States benefit?," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 51-70.
  18. Paul R. Masson, 1998. "Contagion," IMF Working Papers 98/142, International Monetary Fund.
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Cited by:
  1. Thomas D. Willett & Nancy Neiman Auerbach, 2002. "The Political Economy of Perverse Financial Liberalization: Examples from the Asian Crisis," Claremont Colleges Working Papers 2002-26, Claremont Colleges.

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