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A Krugman-Dooley-Sachs Third Generation Model of the Asian Financial Crisis

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  • Irwin, Gregor
  • Vines, David

Abstract

This paper presents a multiple-equilibrium model of the Asian financial crisis. The economy has Krugman-style over-investment caused by weak financial regulation and exacerbated by government guarantees. Following Dooley, the government only has a limited capacity or willingness to honour such guarantees. The model has a unique long-run equilibrium, with over-investment. But in the short run, in which the capital stock is fixed, it also has multiple equilibria. If lenders regard lending as low-risk, then it is. But if they regard lending as high-risk then the cost of honouring guarantees rises, making the lending high-risk and the risk premium self-justifying. We argue that this model usefully captures the ideas of panic and collapse which have been popularised in Sachs' discussions of the Asian crisis.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2149.

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Date of creation: May 1999
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Handle: RePEc:cpr:ceprdp:2149

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Related research

Keywords: Asian Economic Crisis; Financial Crisis; Multiple Equilibrium; Over-Investment;

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References

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  1. Agénor,Pierre-Richard & Miller,Marcus & Vines,David & Weber,Axel (ed.), 1999. "The Asian Financial Crisis," Cambridge Books, Cambridge University Press, number 9780521770804, October.
  2. Jenny Corbett & David Vines, 1999. "Asian Currency and Financial Crises: Lessons from Vulnerability, Crisis and Collapse," The World Economy, Wiley Blackwell, vol. 22(2), pages 155-177, 03.
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Cited by:
  1. Faruk Ulgen, 2011. "Shaky emerging economies in view of the global financial crisis: The Turkish economy after three decades of liberal reforms," Working Papers halshs-00669714, HAL.
  2. Ari, Ali, 2012. "Early warning systems for currency crises: The Turkish case," Economic Systems, Elsevier, vol. 36(3), pages 391-410.
  3. Pompeo Della Posta, 2002. "Modelli di crisi valutarie e misure di politica economica," Moneta e Credito, Economia civile, vol. 55(219), pages 237-262.
  4. Femminis, Gianluca, 2007. "Currency Attacks With Multiple Equilibria And Imperfect Information: The Role Of Wage-Setters," Macroeconomic Dynamics, Cambridge University Press, vol. 11(01), pages 79-112, February.
  5. Clara Garcia, 2004. "Capital Inflows, Policy Responses, and Their Ill Consequences: Thailand, Malaysia, and Indonesia in the Decade Before the Crises," Working Papers wp81, Political Economy Research Institute, University of Massachusetts at Amherst.
  6. Femminis, Gianluca & Ruggerone, Luigi, 2001. "'Crony Capitalism', Bail Outs and Bank Runs," CEPR Discussion Papers 2751, C.E.P.R. Discussion Papers.
  7. Kenc, Turalay & Ozkan, Aydin & Ozkan, F. Gulcin, 2005. "Corporate bankruptcies and official bail-outs: A cost-benefit analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(5), pages 437-453, December.

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