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Challenges and choices in post-crisis East-Asia: simulations of investment policy reform in an intertemporal, global model

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  • Xinshen Diao
  • Wenli Li
  • Erinc Yeldan

Abstract

The East Asian financial crisis exposed the problems of excessive government intervention in credit allocation and poor supervision of the banking system. We argue that the crisis is an opportunity to reformulate the strategies of growth by way of eliminating politicized intervention on investment. In an intertemporal general equilibrium model, we examine the adjustment processes of the crisis-hit region and the world economies, and investigate the removal of the investment subsidies. Our results suggest that the immediate impact of the crisis on the Asian economies is a contraction of GDP and investment. We also find significant welfare gains in the crisis-hit economies in response to elimination of the subsidies to firm's investment.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 98-07.

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

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Keywords: Financial institutions ; Banks and banking; Foreign;

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  1. Alba, Pedro & Bhattacharya, Amar & Claessens, Stijn & Ghosh, Swati & Hernandez, Leonardo, 1998. "Volatility and contagion in a financially integrated world : lessons from East Asia's recent experience," Policy Research Working Paper Series 2008, The World Bank.
  2. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-93, May.
  3. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
  4. Bardhan, Pranab, 1990. "Symposium on the State and Economic Development," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 3-7, Summer.
  5. Ronald I. McKinnon & Huw Pill, 1998. "International Overborrowing: A Decomposition of Credit and Currency Risks," Working Papers 98004, Stanford University, Department of Economics.
  6. Dalla, I. & Khatkhate, D., 1995. "Regulated Deregulation of the Financial System in Korea," World Bank - Discussion Papers 292, World Bank.
  7. J. Mercenier & Erinç Yeldan, 1996. "On Turkey's Trade Policy : Is A Customs Union with Europe Enough?," Departmental Working Papers 964, Bilkent University, Department of Economics.
  8. Diao, Xinshen & Somwaru, Agapi, 2000. "An Inquiry on General Equilibrium Effects of MERCOSUR--An Intertemporal World Model," Journal of Policy Modeling, Elsevier, vol. 22(5), pages 557-588, September.
  9. Diao, Xinshen & Roe, Terry & Yeldan, Erinc, 1999. "Strategic policies and growth: an applied model of R&D-driven endogenous growth," Journal of Development Economics, Elsevier, vol. 60(2), pages 343-380, December.
  10. Mercenier, J. & Da Conceicao Sampaio de Souza, M., 1991. "Structural Adjustment and Growth in a Highy Indebted Market Economy: Brazil," Cahiers de recherche 9103, Universite de Montreal, Departement de sciences economiques.
  11. Paul Krugman, 1996. "Are Currency Crises Self-Fulfilling?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 345-407 National Bureau of Economic Research, Inc.
  12. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
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Cited by:
  1. Adelman, Irma & Yeldan, Erinc, 2000. "The Minimal Conditions for a Financial Crisis: A Multiregional Intertemporal CGE Model of the Asian Crisis," World Development, Elsevier, vol. 28(6), pages 1087-1100, June.

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