The East Asian crisis: investigating causes and policy responses

Warwick McKibbin and Will Marin

No 2172, Policy Research Working Paper Series from The World Bank

Abstract: The authors identify as the primary cause of the East Asian crisis a fundamental reassessment of the profitability of investments in the region. They identify a number of secondary shocks as well, including interest risk premia, monetary expansion, and declines in output brought about by failures of the financial market. Unlike the Latin American crisis of the 1980s, the East Asian crisis did not reflect commodity price shocks, large changes in world interest rates, fiscal imbalances, or inflationary shocks. It involved large-scale borrowing abroad, but by the private sector rather than the government - andfor the normally well-regarded purpose of funding capital investment. It seems unlikely that terms of trade shocks or changes in exchange rates due to pegging to the dollar could, alone, have caused an adjustment crisis of this magnitude - although they could have helped trigger the crisis. More important, expectations of future growth in returns to the corporate sector began to fall. Declines in asset valuations caused major shifts in investment portfolios, and the consequences of asset market shocks were compounded by secondary shocks associated with the abrupt shift to floating rates, concerns about the credibility of government policies, weaknesses in financial sectors, and inadequacies in the mechanisms for corporate restructuring and liquidation. The authors use of forward-looking modeling framework to capture some of the major interactions between asset markets, output, and trade in the countries worst hit by the crisis. They find that the model is able to capture the main features of the crisis.

Keywords: Environmental Economics&Policies; Economic Theory&Research; Payment Systems&Infrastructure; Fiscal&Monetary Policy; International Terrorism&Counterterrorism; Economic Theory&Research; Environmental Economics&Policies; Economic Stabilization; Macroeconomic Management; Banks&Banking Reform (search for similar items in EconPapers)
Date: 1999-08-31
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Citations: View citations in EconPapers (9)

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Working Paper: The East Asian Crisis: Investigating Causes and Policy Responses (1998)
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