Asian Crises: Theory, Evidence, Warning-Signals

Jerome Stein () and Guay C. Lim ()

No CESifo Working Paper No. 1159, CESifo Working Paper Series from CESifo Group Munich

Abstract: In July 1997, the economies of East Asia became embroiled in one of the worst financial crises of the post-war period. Yet, prior to the crisis, these economies were seen as models of economic growth experiencing sustained growth rates that exceeded those earlier thought unattainable. Why did the market not anticipate the crises? To this end, we review the Asian financial crisis from two related perspectives - whether the crisis was precipitated by a failure of the real exchange rate to be aligned with its fundamental determinants and/or whether the crisis was precipitated by a divergence of the foreign debt from its optimal path. The first perspective is based on a coherent theory of the equilibrium real exchange rate - the NATREX model - that shows how "misalignments" lead to currency crises. The second perspective is based on a model of optimal foreign debt ratio - derived from stochastic optimal control - which shows why "divergences" lead to debt crises. The important point here is that these models suggest important variables which may serve as warning signals to predict crises.

Keywords: Asian crises; optimal debt; equilibrium exchange rates; NATREX; stochastic optimal control; warning signals of crises; exchange rate misalignment (search for similar items in EconPapers)
JEL-codes: F30 F31 F32 F34 F40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-ifn and nep-sea
Date: 2004
View list of references View citations in EconPapers

Downloads: (external link)
http://www.cesifo-group.de/DocCIDL/cesifo1_wp1159.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:ces:ceswps:_1159

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Group Munich
Address: Poschingerstrasse 5, 81679 Munich
Series data maintained by Julio Saavedra ().