Explaining the Twin Crises in Indonesia
The co-existence of the ‘twin’ banking and currency crises in emerging market economies has raised concerns regarding the underlying causes and potential remedies. Literatures suggest that there are at least three major approaches that could be used to explain the phenomenon: the microeconomic perspective which emphasizes the role of asymmetric information problems in the banking sector, the macroeconomics perspectives that link the financial liberalization with the banking sector risky behaviors, and the new institutional perspectives incorporating political and financial institutions into the analysis of crisis. Using these frameworks to analyze the twin crises in Indonesia during the 1997-2000 periods, it is suggested that the crises are rooted in and could be well-explained by the asymmetric information model. Although the other models also influence the co-existence of banking and currency crises, it was the asymmetric information problems before and during the crises combined with political turmoil which magnified the contagion effect of the currency crisis in the neighboring countries to the Indonesian economy. Prior to the crises, moral hazard and adverse selection problems both in economic and political fields have significantly contributed to weak micro banking fundamental in the Indonesian banking system. High non-performing loans and weaknesses in the prudential regulation were also evident. Similarly, the post crises experiences demonstrated that uncertainty regarding the economic reform programs and political stability had undermined market confidence, triggered bank panics and worsened currency crisis. Findings of this study are expected to increase understanding on the determinants of twin crises as well as to provide valuable lessons in managing and maintaining robust financial sector in Indonesia.
|Date of creation:||May 2011|
|Date of revision:||May 2011|
|Contact details of provider:|| Phone: (021)-7272425|
Web page: http://www.feb.ui.ac.id
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Leslie E Teo & Charles Enoch & Carl-Johan Lindgren & TomÃ¡s J. T. BaliÃ±o & Anne Marie Gulde & Marc G Quintyn, 2000. "Financial Sector Crisis and Restructuring; Lessons from Asia: Lessons from Asia," IMF Occasional Papers 188, International Monetary Fund.
- Kane, Edward J. & Klingebiel, Daniela, 2004. "Alternatives to blanket guarantees for containing a systemic crisis," Journal of Financial Stability, Elsevier, vol. 1(1), pages 31-63, September.
- Demirguc-Kunt, Asli & Detragiache, Enrica, 1999.
"Does deposit insurance increase banking system stability ? An empirical investigation,"
Policy Research Working Paper Series
2247, The World Bank.
- Demirguc-Kunt, Asli & Detragiache, Enrica, 2002. "Does deposit insurance increase banking system stability? An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1373-1406, October.
- Asli Demirguc-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation," Econometric Society World Congress 2000 Contributed Papers 1751, Econometric Society.
- Graciela L. Kaminsky & Carmen M. Reinhart, 1996.
"The twin crises: the causes of banking and balance-of-payments problems,"
International Finance Discussion Papers
544, Board of Governors of the Federal Reserve System (U.S.).
- Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
- Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
- Reinhart, Carmen & Kaminsky, Graciela, 2000.
"Las crisis gemelas: las causas de los problemas bancarios y de balanza de pagos
[The twin crises: Te causes of banking and balance of payments problems]," MPRA Paper 13842, University Library of Munich, Germany.
- Reuven Glick & Ramon Moreno & Mark M. Spiegel, 2001. "Financial crises in emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar.23.
- N. Gregory Mankiw, 1986.
"The Allocation of Credit and Financial Collapse,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 101(3), pages 455-470.
- Mari Pangestu & Manggi Habir, 2002. "The Boom, Bust and Restructuring of Indonesian Banks," IMF Working Papers 02/66, International Monetary Fund.
- Stiglitz, Joseph E, 1996. "Some Lessons from the East Asian Miracle," World Bank Research Observer, World Bank Group, vol. 11(2), pages 151-77, August.
- Paola Bongini & Stijn Claessens & Giovanni Ferri, 2001.
"The Political Economy of Distress in East Asian Financial Institutions,"
Journal of Financial Services Research,
Springer;Western Finance Association, vol. 19(1), pages 5-25, February.
- Bongini, Paola & Claessens, Stijn & Ferri, Giovanni, 2000. "The political economy of distress in East Asian financial institutions," Policy Research Working Paper Series 2265, The World Bank.
- Hill,Hal, 2000. "The Indonesian Economy," Cambridge Books, Cambridge University Press, number 9780521663670, December.
- Young, Alwyn, 1994. "Lessons from the East Asian NICS: A contrarian view," European Economic Review, Elsevier, vol. 38(3-4), pages 964-973, April.
- Craig O. Brown & I. Serdar Dinç, 2005. "The Politics of Bank Failures: Evidence from Emerging Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 120(4), pages 1413-1444.
- McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-93, May.
When requesting a correction, please mention this item's handle: RePEc:lpe:wpecbs:201102. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Muhammad Halley Yudhistira)
If references are entirely missing, you can add them using this form.