Asset Bubbles, Domino Effects and 'Lifeboats': Elements of the East Asian Crisis
Hali Edison (),
Pongsak Luangaram and
Marcus Miller ()
No 1866, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Credit market imperfections have been blamed for the depth and persistence of the Great Depression in the US. Could similar mechanisms have played a role in ending the East Asian miracle? After a brief account of the nature of the recent crises, we use Kiyotaki and Moore’s (1997) model of highly levered credit-constrained firms to explore this question. As applied to land-holding property companies, it predicts greatly amplified responses to financial shocks – like the ending of the land price bubble or the fall of the exchange rate. The initial fall in asset values is followed by the ‘knock-on’ effects of the scramble for liquidity as companies sell land to satisfy their collateral requirements – causing land prices to fall further. This could lead to financial collapse where – like falling dominoes – prudent firms are brought down by imprudent firms. Key to avoiding collapse is the nature of financial stabilization policy; in a crisis, temporary financing can prevent illiquidity becoming insolvency and launching ‘lifeboats’ can do the same. But the vulnerability of financial systems, like those in East Asia, to short-term foreign currency exposure suggests that preventive measures are also required.
Keywords: asset price bubbles; Credit Market Imperfections; Financial Crisis; illiquidity and insolvency (search for similar items in EconPapers)
JEL-codes: E32 G21 G32 G33 O54 (search for similar items in EconPapers)
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Working Paper: Asset bubbles, domino effects and 'lifeboats': elements of the East Asian crisis (1998)
Working Paper: Asset Bubbles, Domino Effects and 'Lifeboats': Elements of the East Asian Crisis (1998)
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