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The East Asian crisis : investigating causes and policy responses

  • McKibbin, Warwick
  • Marin, Will

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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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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  1. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
  2. Kaminsky, Graciela L. & Leiderman, Leonardo, 1998. "High real interest rates in the aftermath of disinflation: is it a lack of credibility?," Journal of Development Economics, Elsevier, vol. 55(1), pages 191-214, February.
  3. Feldstein, Martin, 1980. "Inflation and the Stock Market," American Economic Review, American Economic Association, vol. 70(5), pages 839-47, December.
  4. Young, Alwyn, 1994. "Lessons from the East Asian NICS: A contrarian view," European Economic Review, Elsevier, vol. 38(3-4), pages 964-973, April.
  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. 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.
  7. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  8. 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.
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