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What Caused the Asian Currency and Financial Crisis?

  • Giancarlo Corsetti

    (Yale University)

  • Paolo Pesenti

    (Federal Reserve Bank of New York and NBER)

  • Nouriel Roubini

    (New York University, CEPR and NBER)

The paper explores the view that the Asian currency and financial crises in 1997 and 1998 reflected structural and policy distortions in the countries of the region, even though market overreaction and herding caused the plunge of exchange rates, asset prices and economic activity to be more severe than was warranted by the initial weak economic conditions. The first part of the paper provides an overview of economic fundamentals in Asia on the eve of the crisis, with emphasis on current account imbalances, quantity and quality of financial ‘overlending’, banking problems, and the composition, maturity and size of capital inflows. The second part of the paper presents a reconstruction of the Asian meltdown — from the antecedents in 1995-96 to the recent developments in the summer of 1998 — in parallel with a survey of the debate on the strategies to recover from the crisis, the role of international intervention, and the costs and benefits of capital controls.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 343.

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Date of creation: Dec 1998
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Handle: RePEc:bdi:wptemi:td_343_98
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