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The Asian Disease: Plausible Diagnoses, Possible Remedies

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  • Martin Mayer

    (The Jerome Levy Economics Institute)

Abstract

The Asian crisis is a textbook case of the "financial instability hypothesis" first expressed in 1966 by the late Hyman Minsky. It began with what Minsky described as "the economics of euphoria:...The confident expectation of a steady stream of prosperity gross profits [produces a] willingness...to take what would have been considered in earlier times undesirable chances in order to finance the acquisition of additional capital goods...Those that supply financial resources live in the same expectational climate as those that demand them...An essential aspect of a euphoric economy is the construction of liability structures which imply payments that are closely articulated...to cash flows due to income production...Withdrawals on the supply side of financial markets may force demanding units that were under no special strain and were not directly affected by financial stringencies to look for new financing connections. An initial disturbance can cumulate through such third- party or innocent-party bystanders...Financial instability occurs whenever a large number of units resort to extraordinary sources for cash.

Suggested Citation

  • Martin Mayer, 1998. "The Asian Disease: Plausible Diagnoses, Possible Remedies," Macroeconomics 9805015, EconWPA.
  • Handle: RePEc:wpa:wuwpma:9805015
    Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 41; figures: included
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    File URL: http://econwpa.repec.org/eps/mac/papers/9805/9805015.pdf
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    References listed on IDEAS

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    1. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-558, June.
    2. Eichengreen, Barry, 1993. "International Monetary Arrangements for the 21st Century," Center for International and Development Economics Research (CIDER) Working Papers 233202, University of California-Berkeley, Department of Economics.
    3. Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
    4. Kregel, J A, 1998. "Derivatives and Global Capital Flows: Applications to Asia," Cambridge Journal of Economics, Oxford University Press, vol. 22(6), pages 677-692, November.
    5. 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.
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    Cited by:

    1. Kane, Edward J., 2000. "Capital movements, banking insolvency, and silent runs in the Asian financial crisis," Pacific-Basin Finance Journal, Elsevier, vol. 8(2), pages 153-175, May.
    2. Davidson, Paul, 2000. "Is a Plumber or a New Financial Architect Needed to End Global International Liquidity Problems?," World Development, Elsevier, vol. 28(6), pages 1117-1131, June.
    3. Kane, Edward J., 2000. "The dialectical role of information and disinformation in regulation-induced banking crises," Pacific-Basin Finance Journal, Elsevier, vol. 8(3-4), pages 285-308, July.
    4. Jomo Kwame Sundaram, 2008. "Obstacles To Implementing Lessons from the 1997-1998 East Asian Crises," Working Papers 66, United Nations, Department of Economics and Social Affairs.

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    JEL classification:

    • E - Macroeconomics and Monetary Economics

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