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Asset bubbles, domino effects and 'lifeboats': elements of the East Asian crisis

Hali Edison (), Pongsak Luangaram and Marcus Miller ()

No 606, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Credit market imperfections have been blamed for the depth and persistence of the Great Depression in the USA. 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 a model of highly levered credit-constrained firms due to Kiyotaki and Moore (1997) 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 stabilisation 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: Financial crises - Asia; Financial markets; Asia (search for similar items in EconPapers)
Date: 1998
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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)
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