Latin America and East Asia in the Context of an Insurance Model of Currency Crises

Menzie Chinn, Michael Dooley and Sona Shrestha

No 7091, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper focuses on the 1995 Latin American and 1997 East Asian crises using an insurance-based model of financial crises. First the model of Dooley (forthcoming) is described. Second, some empirical evidence for an insurance model is presented. The key variables in this approach include the ratio of foreign exchange reserves to bank loans (domestic credit) extended to the private sector, the ability of the private sector to appropriate government assets, and appropriation as measured by capital flight. We argue that the insurance model is consistent with the observed evolution of these variables in the recent crises in Latin America and Asia. Finally, we examine the statistical evidence in favor of the model using panel regressions. We find that the econometric results are consistent with the insurance model, and tend to support this approach over some competing explanations.

JEL-codes: F31 F34 (search for similar items in EconPapers)
Date: 1999-04
New Economics Papers: this item is included in nep-his and nep-ifn
Note: IFM
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Citations: View citations in EconPapers (50)

Published as Journal of Economic Perspectives, Vol. 13 (Spring 1999): 45-68. Journal of International Money and Finance, Vol. 18, no. 4 (August 1999): 659-681.

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