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Thoughts on the origins of the Asia crisis: impulses and propagation mechanisms

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  • Reuven Glick

Abstract

The traditional fundamentals suggested by first and second-generation of crisis models did not provide much indication of an impending crisis in Asia. Growing current account deficits and somewhat overvalued real exchange rates suggested some need to curtail domestic demand and/or engineer nominal currency depreciation, but did not suggest a crisis of the magnitude that has occurred. ; Nevertheless, to a large extent, the Asian crisis can be explained in terms of impulses and propagation mechanisms related to fundamentals, specifically general weaknesses and distortions in the financial sector. These included relationship lending practices, excessive risk taking, and inadequate financial supervision and regulation. The effects of these factors was cumulative and increased the vulnerability of Asia to bad shocks. Once the crisis hit, various mechanisms magnified its initial impact. These included the effects of excessive leverage, collateralized lending, competitive devaluations, and exposure of unhedged foreign liabilities. Elements of illiquidity-based financial panic may also have played a role. It is important to emphasize, however, the difficulty in identifying whether the motivation for the panic was based in a spontaneous shift in creditor confidence or to changing fundamentals.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 98-07.

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Date of creation: 1998
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Handle: RePEc:fip:fedfpb:98-07

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Keywords: Asia ; East Asia ; Financial crises - Asia;

References

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  1. Moreno, R. & Pasadilla, G. & Remolona, E., 1998. "Asia's Financial Crisis: Lessons and Policy Responses," Papers 98-02, Economisch Institut voor het Midden en Kleinbedrijf-.
  2. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  3. Kenneth Kasa, 1998. "Borrowing constraints and asset market dynamics: evidence from the Pacific Basin," Pacific Basin Working Paper Series 98-04, Federal Reserve Bank of San Francisco.
  4. Chan Huh & Kenneth Kasa, 1997. "A dynamic model of export competition, policy coordination and simultaneous currency collapse," Pacific Basin Working Paper Series 97-08, Federal Reserve Bank of San Francisco.
  5. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
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  7. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The “Overborrowing Syndrome”," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
  8. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "What caused the Asian currency and financial crisis?," Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373, October.
  9. Helmut Reisen, 1998. "Domestic Causes of Currency Crises: Policy Lessons for Crisis Avoidance," OECD Development Centre Working Papers 136, OECD Publishing.
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  11. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
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  13. Hali J. Edison & Pongsak Luangaram & Marcus Miller, 1998. "Asset bubbles, domino effects and 'lifeboats': elements of the East Asian crisis," International Finance Discussion Papers 606, Board of Governors of the Federal Reserve System (U.S.).
  14. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
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  16. Fukuda, Shin-ichi & Hoshi, Takeo & Ito, Takatoshi & Rose, Andrew, 2006. "International Finance," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 455-458, December.
  17. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  18. Frederic S. Mishkin, 1997. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
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  20. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part I: A Macroeconomic Overview," NBER Working Papers 6833, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Ryuzo Miyao, 2004. "Economic Fundamentals or Financial Panic? An Empirical Study on the Origins of the Asian Crisis," Discussion Paper Series 151, Research Institute for Economics & Business Administration, Kobe University.
  2. Marvin Goodfriend, 2007. "International Adjustment in the New Neoclassical Synthesis," Kiel Working Papers 1345, Kiel Institute for the World Economy.
  3. Pablo Bustelo & Clara Garcia & Iliana Olivie, 1999. "Global and Domestic Factors of Financial Crises in Emerging Economies: Lessons from the East Asian Episodes (1997-1999)," Working Papers 002, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales.
  4. Wink Joosten, 2004. "The Asian Financial Crisis in Retrospect: What Happened? What Can We Conclude?," CPB Memorandum 87, CPB Netherlands Bureau for Economic Policy Analysis.
  5. Kessara Thanyalakpark & Darren Filson, . "Testing for Contagion during the Asian Crisis," Claremont Colleges Working Papers 2001-23, Claremont Colleges.

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