Paper Tigers? A Model of the Asian Crisis

Giancarlo Corsetti, Paolo Pesenti and Nouriel Roubini ()

No 6783, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops an interpretation of the Asian meltdown focused on moral hazard as the common source of overinvestment, excessive external borrowing, and current account deficits. To the extent that foreign creditors are willing to lend to domestic agents against future bail-out revenue from the government, unprofitable projects and cash shortfalls are re-financed through external borrowing. While public deficits need not be high before a crisis, the eventual refusal of foreign creditors to refinance the country's cumulative losses forces the government to step in and guarantee the outstanding stock of external liabilities. To satisfy solvency, the government must then undertake appropriate domestic fiscal reforms, possibly involving recourse to seigniorage revenues. Expectations of inflationary financing thus cause a collapse of the currency and anticipate the event of a financial crisis. The empirical section of the paper presents evidence in support of the thesis that weak cyclical performances, low foreign exchange reserves, and financial deficiencies resulting into high shares of non-performing loans were at the core of the Asian collapse.

JEL-codes: F31 F34 (search for similar items in EconPapers)
Date: 1998-11
New Economics Papers: this item is included in nep-ifn
Note: IFM
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Citations: View citations in EconPapers (123)

Published as European Economic Review, Vol. 43 (1999): 1211-1236.

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Journal Article: Paper tigers?: A model of the Asian crisis (1999)
Working Paper: Paper tigers? A model of the Asian crisis (1998)
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