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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. 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.
  2. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," Working Paper 98-10, Federal Reserve Bank of Atlanta.
  3. 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.
  4. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
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  8. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
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  11. Helmut Reisen, 1998. "Domestic Causes of Currency Crises: Policy Lessons for Crisis Avoidance," OECD Development Centre Working Papers 136, OECD Publishing.
  12. Takatoshi Ito & Anne O. Krueger, 1996. "Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5," NBER Books, National Bureau of Economic Research, Inc, number ito_96-1, octubre-d.
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  16. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
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  18. Kenneth Kasa, 1998. "Borrowing constraints and asset market dynamics: evidence from the Pacific Basin," Economic Review, Federal Reserve Bank of San Francisco, pages 17-28.
  19. Ramon Moreno & Gloria Pasadilla & Eli Remolona, 1998. "Asia's financial crisis: lessons and policy responses," Pacific Basin Working Paper Series 98-02, Federal Reserve Bank of San Francisco.
  20. 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.
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Cited by:
  1. 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.
  2. 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.
  3. Kessara Thanyalakpark & Darren Filson, . "Testing for Contagion during the Asian Crisis," Claremont Colleges Working Papers 2001-23, Claremont Colleges.
  4. Marvin Goodfriend, 2007. "International Adjustment in the New Neoclassical Synthesis," Kiel Working Papers 1345, Kiel Institute for the World Economy.
  5. 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.

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