Financial market contagion and the effects of the crises in East Asia, Russia and Latin America

Ray Barrell, Karen Dury, Dawn Holland, Nigel Pain and Dirk Willem te Velde

National Institute Economic Review, 1998, vol. 166, 57-73

Abstract: The Asian crisis has had a marked effect on the world economy over the past fifteen months. Private sector demand has collapsed in the affected economies and reinforced the effects arising from the deflationary forces in the Japanese economy at present. Up until this summer it did not appear likely that the world economy as a whole would slide into a full scale recession, although it was clear that growth had begun to slow in the industrialised economies. There were also important downside risks in our forecasts at that time; in particular the danger that a policy of monetisation in Japan would further weaken the yen and set in motion renewed disruption by enforcing a devaluation of the Chinese yuan against the dollar. It was also clear that profit margins were coming under pressure in the US economy, raising the possibility that future dividends would be somewhat weaker than implied by the exceptionally rapid growth in real equity prices since 1994. Neither a Chinese devaluation nor an equity price collapse were however part of our central forecasts.

Date: 1998
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