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A Krugman-Dooley-Sachs Third Generation Model of the Asian Financial Crisis


  • Irwin, Gregor
  • Vines, David


This paper presents a multiple-equilibrium model of the Asian financial crisis. The economy has Krugman-style over-investment caused by weak financial regulation and exacerbated by government guarantees. Following Dooley, the government only has a limited capacity or willingness to honour such guarantees. The model has a unique long-run equilibrium, with over-investment. But in the short run, in which the capital stock is fixed, it also has multiple equilibria. If lenders regard lending as low-risk, then it is. But if they regard lending as high-risk then the cost of honouring guarantees rises, making the lending high-risk and the risk premium self-justifying. We argue that this model usefully captures the ideas of panic and collapse which have been popularised in Sachs' discussions of the Asian crisis.

Suggested Citation

  • Irwin, Gregor & Vines, David, 1999. "A Krugman-Dooley-Sachs Third Generation Model of the Asian Financial Crisis," CEPR Discussion Papers 2149, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2149

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    References listed on IDEAS

    1. Jenny Corbett & David Vines, 1999. "Asian Currency and Financial Crises: Lessons from Vulnerability, Crisis and Collapse," The World Economy, Wiley Blackwell, vol. 22(2), pages 155-177, March.
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    Cited by:

    1. Femminis, Gianluca, 2007. "Currency Attacks With Multiple Equilibria And Imperfect Information: The Role Of Wage-Setters," Macroeconomic Dynamics, Cambridge University Press, vol. 11(01), pages 79-112, February.
    2. Ulgen, Faruk, 2010. "Shaky emerging economies in view of the global financial crisis: the Turkish economy after three decades of liberal reforms," MPRA Paper 35467, University Library of Munich, Germany.
    3. Femminis, Gianluca & Ruggerone, Luigi, 2001. "'Crony Capitalism', Bail Outs and Bank Runs," CEPR Discussion Papers 2751, C.E.P.R. Discussion Papers.
    4. Clara Garcia, 2004. "Capital Inflows, Policy Responses, and Their Ill Consequences: Thailand, Malaysia, and Indonesia in the Decade Before the Crises," Working Papers wp81, Political Economy Research Institute, University of Massachusetts at Amherst.
    5. Ahec Šonje, Amina & Babić, Ante, 2002. "Measuring and predicting currency disturbances in Croatia: the “signals” approach," MPRA Paper 83137, University Library of Munich, Germany, revised Apr 2002.
    6. Kenc, Turalay & Ozkan, Aydin & Ozkan, F. Gulcin, 2005. "Corporate bankruptcies and official bail-outs: A cost-benefit analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(5), pages 437-453, December.
    7. Pompeo Della Posta, 2002. "Modelli di crisi valutarie e misure di politica economica," Moneta e Credito, Economia civile, vol. 55(219), pages 237-262.
    8. Ante Babić & Ante Žigman, 2001. "Currency Crises: Theoretical and Empirical Overview of the 1990s," Surveys 5, The Croatian National Bank, Croatia.
    9. Ari, Ali, 2012. "Early warning systems for currency crises: The Turkish case," Economic Systems, Elsevier, vol. 36(3), pages 391-410.
    10. Ahec Šonje, Amina & Babić, Ante & Mlinarević, Katarina, 2003. "Determinants of currency disturbances in transition economies of Central and Eastern Europe," MPRA Paper 83140, University Library of Munich, Germany, revised Mar 2003.

    More about this item


    Asian Economic Crisis; Financial Crisis; Multiple Equilibrium; Over-Investment;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance


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