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The East Asian crisis : investigating causes and policy responses

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  • McKibbin, Warwick
  • Marin, Will

Abstract

The authors identify as the primary cause of the East Asian crisis a fundamental reassessment of the profitability of investments in the region. They identify a number of secondary shocks as well, including interest risk premia, monetary expansion, and declines in output brought about by failures of the financial market. Unlike the Latin American crisis of the 1980s, the East Asian crisis did not reflect commodity price shocks, large changes in world interest rates, fiscal imbalances, or inflationary shocks. It involved large-scale borrowing abroad, but by the private sector rather than the government - andfor the normally well-regarded purpose of funding capital investment. It seems unlikely that terms of trade shocks or changes in exchange rates due to pegging to the dollar could, alone, have caused an adjustment crisis of this magnitude - although they could have helped trigger the crisis. More important, expectations of future growth in returns to the corporate sector began to fall. Declines in asset valuations caused major shifts in investment portfolios, and the consequences of asset market shocks were compounded by secondary shocks associated with the abrupt shift to floating rates, concerns about the credibility of government policies, weaknesses in financial sectors, and inadequacies in the mechanisms for corporate restructuring and liquidation. The authors use of forward-looking modeling framework to capture some of the major interactions between asset markets, output, and trade in the countries worst hit by the crisis. They find that the model is able to capture the main features of the crisis.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2172.

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Date of creation: 31 Aug 1999
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Handle: RePEc:wbk:wbrwps:2172

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Keywords: Environmental Economics&Policies; Economic Theory&Research; Payment Systems&Infrastructure; Fiscal&Monetary Policy; International Terrorism&Counterterrorism; Economic Theory&Research; Environmental Economics&Policies; Economic Stabilization; Macroeconomic Management; Banks&Banking Reform;

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  1. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis?," Temi di discussione (Economic working papers) 343, Bank of Italy, Economic Research and International Relations Area.
  2. Martin Feldstein, 1978. "Inflation and the Stock Market," NBER Working Papers 0276, National Bureau of Economic Research, Inc.
  3. Wilson, Charles A, 1979. "Anticipated Shocks and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 639-47, June.
  4. Kaminsky, G.L. & Leiderman, L., 1996. "High Real Interest Rates in the Aftermath of Disinflation: Is It a Lack of Credibility," Papers 8-96, Tel Aviv.
  5. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  6. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  7. Falvey, Rodney E & Gemmell, Norman, 1991. "Explaining Service-Price Differences in International Comparisons," American Economic Review, American Economic Association, vol. 81(5), pages 1295-309, December.
  8. Young, Alwyn, 1994. "Lessons from the East Asian NICS: A contrarian view," European Economic Review, Elsevier, vol. 38(3-4), pages 964-973, April.
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Citations

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Cited by:
  1. Mardi Dungey & Renee Fry & Vance Martin & Brenda González-Hermosillo, 2004. "Empirical Modeling of Contagion," IMF Working Papers 04/78, International Monetary Fund.
  2. Diwan, Ishac & Hoekman, Bernard, 1999. "Competition, Complementarity and Contagion in East Asia," CEPR Discussion Papers 2112, C.E.P.R. Discussion Papers.
  3. Shaun Bond & Mardi Dungey & Renée Fry, 2006. "A Web Of Shocks: Crises Across Asian Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 32(3), pages 253-274, May.
  4. Fabrice Capoen & Jerome Creel & Pascal Cussy & Hélène Lenoble-Liaud, 2000. "How to manage speculative shocks: intra-European vs. International monetary coordination," Documents de Travail de l'OFCE 2000-01, Observatoire Francais des Conjonctures Economiques (OFCE).
  5. Lin, Justin Yifu & Martin, William J., 2009. "The Financial Crisis and Its Impact on the Global Agricultural Landscape," 2009 Conference, August 16-22, 2009, Beijing, China 53208, International Association of Agricultural Economists.
  6. Adrian Pagan, 1999. "The Getting of Macroeconomic Wisdom," CEPR Discussion Papers 412, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  7. Duncan, Ronald C. & Yang, Yongzheng, 2000. "The impact of the Asian Crisis on Australia's primary exports: why it wasn't so bad," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 44(3), September.
  8. Rajan, Ramkishen S. & Sugema, Iman, 2000. "Government bailouts and monetary disequilibrium: common fundamentals in the Mexican and East Asian currency crises," The North American Journal of Economics and Finance, Elsevier, vol. 11(2), pages 123-135, December.
  9. Kirsanova, Tatiana & Menzies, Gordon & Vines, David, 2007. "Stiglitz Versus the IMF on the Asian Debt Crisis: An Intertemporal Model with Real Exchange Rate Overshooting," CEPR Discussion Papers 6318, C.E.P.R. Discussion Papers.
  10. Mardi Dungey & Renée Fry & Vance L. Martin, 2006. "Correlation, Contagion, and Asian Evidence," Asian Economic Papers, MIT Press, vol. 5(2), pages 32-72, June.
  11. repec:spo:wpecon:info:hdl:2441/2978 is not listed on IDEAS
  12. Kumar, Saten, 2009. "Further Evidence on Public Spending and Economic Growth in East Asian Countries," MPRA Paper 19298, University Library of Munich, Germany.
  13. Juthathip Jongwanich, 2006. "Exchange Rate Regimes, Capital Account Opening and Real Exchange Rates: Evidence from Thailand," Departmental Working Papers 2006-01, The Australian National University, Arndt-Corden Department of Economics.
  14. Creel, Jerome & Capoen, Fabrice & Cussy, Pascal & Lenoble-Liaud, Helene, 2003. "How to manage financial shocks: Intra-European vs. international monetary coordination," Journal of Macroeconomics, Elsevier, vol. 25(4), pages 431-455, December.
  15. Naoyuki Yoshino & Sahoko Kaji & Tamon Asonuma, 2011. "Dynamic Effect of Change in Exchange Rate System -From the Fixed Exchange Rate Regime to the Basket-peg or Floating Regime," Keio/Kyoto Joint Global COE Discussion Paper Series 2011-026, Keio/Kyoto Joint Global COE Program.
  16. 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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