What Factors Led to the Asian Financial Crisis: Were or Were Not Asian Economics Sound?

60 Pages Posted: 11 Aug 2009 Last revised: 18 Sep 2009

See all articles by Monika Blaszkiewicz

Monika Blaszkiewicz

Bank of Finland - Institute for Economies in Transition (BOFIT); CASE - Center for Social and Economic Research

Date Written: 2000

Abstract

This paper attempts to confront various theoretical and empirical approaches to the East Asian currency crisis in 1997, but also with emphasis on two recently dominated literature about East Asian financial crisis. One, strongly supported by Corsetti, et. al (1998) stresses fundamental weaknesses, particularly in the financial sector. The other explains the crisis as the problem of illiquidity and multiple equilibria or 'herd behaviour' [Radelet and Sachs, 1998]. These two controversial articles facilitate the main exchange of ideas about the evolution and causes of the collapse of these economies which were viewed initially as very successful on their way to development and integration with the global economy. An econometric probit analysis was done in order to establish the most important determinants of the currency crisis in East Asia. The results were mixed (the probit modelling turned out to be very sensitive to changes in sample size, introduction of new variables and brought up an important issue of causality, the solution of which, or at least limitation of the problem, requires an inclusion of lagged variables in the model), but at least it showed that this type of exercise without further sensitivity analysis could not support Radelet and Sachs' (1998) panic scenario of the Asian meltdown. If anything, it rather pointed to fundamental problems existing in these economies.

Keywords: Asian economics, financial crisis

Suggested Citation

Blaszkiewicz, Monika, What Factors Led to the Asian Financial Crisis: Were or Were Not Asian Economics Sound? (2000). CASE Network Studies and Analyses No. 209, Available at SSRN: https://ssrn.com/abstract=1444832 or http://dx.doi.org/10.2139/ssrn.1444832

Monika Blaszkiewicz (Contact Author)

Bank of Finland - Institute for Economies in Transition (BOFIT) ( email )

Helsinki 00101
Finland

CASE - Center for Social and Economic Research ( email )

Al. Jana Pawła II 61/212
Warsaw, 01-031
Poland