A country's financial system is internationally illiquid if its potential short term obligations in foreign currency exceed the amount of foreign currency it can have access to in short notice. This condition may be crucial for the existence of financial crises and/or exchange rate collapses (Chang and Velasco 1998a, b). In this paper we argue that the 1997-98 crises in Asia were in fact a consequence of international illiquidity. This follows from an analysis of empirical indicators of illiquidity as well as other macroeconomic statistics. We trace the emergence of illiquidity to financial liberalization, the shortening of the foreign debt structure, and the currency denomination of assets versus liabilities. We explain how financial crises became exchange rate collapses due to a government policy of both fixing exchange rates and acting as lender of last resort. Finally, we outline the policy implications of our view for both preventing crises and dealing with them.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6796.
Length: Date of creation: Nov 1998 Date of revision: Handle: RePEc:nbr:nberwo:6796
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Paper
Velasco, A. & Chang, R., 1998.
"The Asian Liquidity Crisis,"
Working Papers
98-27, C.V. Starr Center for Applied Economics, New York University.
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Find related papers by JEL classification: F3 - International Economics - - International Finance E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
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