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The Asian Disease: Plausible Diagnoses, Possible Remedies

  • Martin Mayer
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    The Asian crisis is a textbook case of the "financial instability hypothesis" first expressed in 1966 by the late Hyman Minsky. Minsky's "hypothesis" was proposed to explain instability in a large, insulated, developed economy. Despite its intuitive appeal, it was not widely accepted among financial economists (Charles Kindleberger being a notable exception) because, they said, they could not find historical illustrations to fit the theory. The financial economist's machine runs smoothly in the best of all possible worlds. What makes trouble in the financial economist's world is the exogenous shock that affects everyone (war, oil prices) or government error (fiscal imbalance, monetary policy). "Financial distress," Barry Eichengreen and Richard Portes write in their study of sovereign debt rescheduling, "normally results from a real shock or bad policies." But Asia presents a cumulation of apparently rational decisions that are precisely those Minsky predicted.

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    Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_232.

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    Date of creation: Apr 1998
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    Handle: RePEc:lev:wrkpap:wp_232
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    1. J. A. Kregel, 1998. "Derivatives and Global Capital Flows: Applications to Asia," Macroeconomics 9809001, EconWPA.
    2. Robert Litan & William Isaac & William Taylor, 1994. "Financial Regulation," NBER Chapters, in: American Economic Policy in the 1980s, pages 519-572 National Bureau of Economic Research, Inc.
    3. Guillermo LarraĆ­n & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
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