EconPapers    
Economics at your fingertips  
 

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

Abstract: 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)
Date: 1998-04
References: Add references at CitEc
Citations: View citations in EconPapers (47) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1866 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Asset bubbles, domino effects and 'lifeboats': elements of the East Asian crisis (1998) Downloads
Working Paper: Asset Bubbles, Domino Effects and 'Lifeboats': Elements of the East Asian Crisis (1998)
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: https://EconPapers.repec.org/RePEc:cpr:ceprdp:1866

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=1866

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2021-03-02
Handle: RePEc:cpr:ceprdp:1866