Financial crisis in East Asia: bank runs, asset bubbles and antidotes
Miller, Marcus, 1941- and Luangaram, Pongsak (1998) Financial crisis in East Asia: bank runs, asset bubbles and antidotes. Working Paper. Coventry: University of Warwick. Centre for the Study of Globalisation and Regionalisation. (Working papers (University of Warwick. Centre for the Study of Globalisation and Regionalisation)).
WRAP_Luangaram_wp1198.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Official URL: http://www2.warwick.ac.uk/fac/soc/csgr/research/wo...
Was the East Asian crisis just a creditor panic with a mad scramble for liquidity that brought the banking system to its knees and the region's much-vaunted 'economic miracle' to a standstill? Or was the miracle indeed flawed by fundamental problems in asset prices and resource allocation? After a summary of the facts and an outline of various types of financial crisis, we conclude that the truth involves both factors, interacting in a vicious downward spiral. There certainly was panic among the creditors but it was triggered by genuine problems of overinvestment and overvaluation in emerging East Asian economies. Before turning to outline various approaches of crisis prevention and management and a brief account of the future prospects, we discuss how contagion can occur in environments where investors are poorly informed and each looks to the others for guidance. The paper ends with immediate steps that might help resolve the current crises; and with proposed reforms to the international monetary system to prevent a recurrence.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Economics
Faculty of Social Sciences > Centre for the Study of Globalisation and Regionalisation
|Library of Congress Subject Headings (LCSH):||Financial crises -- East Asia, Banks and banking -- East Asia, Moral hazard, Assets (Accounting), Contagion (Social psychology)|
|Series Name:||Working papers (University of Warwick. Centre for the Study of Globalisation and Regionalisation)|
|Publisher:||University of Warwick. Centre for the Study of Globalisation and Regionalisation|
|Place of Publication:||Coventry|
|Number of Pages:||42|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Economic and Social Research Council (Great Britain) (ESRC)|
|Grant number:||L120251024 (ESRC)|
|References:||Allen, Franklin and Douglas Gale (1997), “Bubbles and Crises,” paper presented at CEPR/ESRC/GEI Conference on The Origins and Management of Financial Crises, Cambridge, England, July. Bagehot, Walter (1915), Lombard Street: A Description of the Money Market, London: Smith, Elder&Co. Banerjee, Abhijit (1992), “A Simple Model of Herd Behavior,” Quarterly Journal of Economics, vol.107, pp.797-817. Bernanke, Ben (1983), “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review, vol.73, June, pp.257-276 Bhattacharya, Amar, Stijn Claessens, Swati Ghosh, Leonardo Hernandez, and Pedro Alba (1998), “Volatility and Contagion in a Financially-Integrated World: Lessons from East Asia’s Recent Experience,” paper presented at the CEPR/World Bank Conference on Financial Crises: Contagion and Market Volatility, London, May. BIS (1998), Annual Report, Basle, Bank for International Settlements, June. Bond, Timothy J and Marcus Miller (1998), “Financial Bailouts and Financial Crises,” mimeo, International Monetary Fund, January. Blanchard, Olivier (1979), “Speculative bubbles, Crashes and Rational expectations,” Economic letters, p.387-9. Calvo, Guillermo A. and Martin Goldstein (1996),”Crisis Prevention and Crisis Management after Mexico: What Role for the Offical Sector?” Center for international Economics Working Paper, no.24, University of Maryland. Campbell, Donald E. (1995), Incentives: Motivation and the Economics of Information, Cambridge: Cambridge University Press. Corsetti, Giancarlo, Paolo Pesenti, and Nouriel Roubini (1998), “What Caused the Asian Currency and Financial Crisis?” paper presented at the CEPR/World Bank Conference on Financial Crises: Contagion and Market Volatility, London, May. Devenow, Andrea and Ive Welch (1996), “Rational Herding in Financial Economics,” European Economic Review, no.40, pp.603-15. Dewatripont, Mathias and Jean Tirole (1994), The Prudential Regulation of Banks, Cambridge, Mass : MIT Press. Diamond, Douglas W. and Philip H. Dybvig (1983), “Bank Runs, Deposit Insurance, and Liquidity,” Journal of Political Economy, vol.91, p.401-19. Dooley, Michael P. (1998), “A Model of Crises in Emerging Markets,” NBER Working Paper, no.6300. Drees, Burkhard and Ceyla Pazarbasioglu (1998), “The Nordic Banking Crises: Pitfalls in Financial Liberalization,” IMF Occasional Paper, no.161, International Monetary Fund, April. Edison, Hali, Pongsak Luangaram and Marcus Miller (1998), “Asset Bubbles, Domino Effects, and ‘Lifeboats’: Elements of East Asian crisis,” International Finance Discussion Papers, no.606, Board of Governors of the Federal Reserve System. Friedman, Milton and Anna Schwatz (1963), A Monetary History of the United States 1867-1960, Princeton: Princeton University Press. Garber, Peter (1990), “Famous First Bubbles,” Journal of Economic Perspectives, vol.4, pp.35-54. Genotte, G., and Hayne Leland (1990), “Market Liquidity, Hedging and Crashes,” American Economic Review, vol.80, p.999-1021. Gerlach, Stefan, and Frank Smets (1994), “Contagious Speculative Attacks,” CEPR Discussion Paper, no.1055. Goldstein, Morris (1997), “The Case for an International Banking Standard,” paper presented at CEPR/ESRC/GEI Conference on The Origins and Management of Financial Crises, Cambridge, England, July. Grossman, Sandy (1987), “An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging Strategies,” NBER Working Paper, no.2357. IIF (1998), Capital flow to Emerging market economies, Institute of International Finance, (29 January 1998). IMF (1997), World Economic Outlook: Interim Assessment, Washington, DC, International Monetary Fund, December. Kindleberger, Charles (1996), “Manias, Panics, and Crashes: A History of Financial Crises, Third Edition, New York: John Wiley and Sons. Kiyotaki, Nobuhiro and John Moore (1997), “Credit Cycles,” Journal of Political Economy, vol 105, April, pp.211-248. Krugman, Paul (1979), “A Model of Balance-of-Payment Crises,” Journal of Money, Credit, and Banking, vol.11, p.311-25. Krugman, Paul (1987), “Trigger Strategies and Price Dynamics in Equity and Foreign Exchange Markets,” NBER Working paper, no.2459. Krugman, Paul (1990), The age of diminished expectations, Cambridge, Mass : MIT Press. Krugman, Paul (1994), “The Myth of Asia’s Miracle,” Foreign Affairs, 73(6), November/December, p.62-78. Krugman, Paul (1998), “What happened to Asia,” mimeo, MIT, January. Krugman, Paul and Marcus Miller (1993), “Why have a target zone?” Carnegie- Rochester Conference Series on Public Policy, no.38, pp.279-314. Lee, In Ho (1997), Market Crashes and Information Avalanches, paper presented at CEPR/ESRC/GEI Conference on The Origins and Management of Financial Crises, Cambridge, England, July. Lindgren, Carl, Gillian Garcia, and Mathew Saal (1996), “Bank Soundness and Macroeconomic Policy,” International Monetary Fund, Washington. Luangaram, Pongsak (1997), “Credit constraints, Collateral, and Crisis: Thailand experiences and theoretical modelling,” MSc Dissertation, University of Warwick, September. Mazumdar, Sumon (1997), “Regulatory monitoring, Closure costs, and Bank moral hazard behavior,” mimeo, August. Masson, Pual (1997), “Monsoonal Effects, Spillovers and Contagion,” paper presented at CEPR/ESRC/GEI Conference on The Origins and Management of Financial Crises, Cambridge, England, July. Miller, Marcus and Lei Zhang (1998), “Sovereign Liquidity Crises: The strategic case for a payments standstill,” CEPR Discussion Paper no.1820, February. Montgomery, John (1997), “The Indonesian Financial System: Its Contribution to Economic Performance, and Key Policy Issues,” IMF Working Paper, WP/97/45, International Monetary Fund, April. Obstfeld, Maurice (1994), “Logic of Currency Crises,” Cahiers Economiques et Monetaires, 43, 189-213. Obstfeld, Maurice (1996), “Models of Currency Crisis with Self-fulfilling Features,” European Economic Review, vol.40, pp.1037-48 Obstfeld, Maurice and Kennett Rogoff (1997), Foundations of International Macroeconomics, Cambridge, Mass : MIT Press Radelet, Steven and Jeffrey Sachs (1998a), “The Onset of the East Asian Financial Crisis,” mimeo, Harvard Institute for International Development, March. Radelet, Steven and Jeffrey Sachs (1998b), “The East Asian Financial Crisis: Diagnosis, Remedies, Prospects,”Brookings Papers on Economic Activity, forthcoming. Rey, Jean-Jacques (1996), The Resolution of Soverign Liquidity Crises, Group of Ten, Washington, DC:IMF. Sachs, Jeffrey (1995), “Do we need an international lender of last resort?” mimeo, Frank Graham lecture, Princeton University. Salant, Stephen and Dale Henderson (1978), “Market Anticipation of Government Policy and the Price of Gold,” Journal of Political Economy, vol.86, p.627-48. Soros, George (1995), Soros on Soros: staying ahead of the curve, New York: John Wiley&Son. Young, Alwyn (1994), “Lessons from the East-Asian NICS - A contrarian view,” European Economic Review, vol.38, pp.964-73. Young, Alwyn (1995), “The Tyrancy of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience,” Quarterly Journal of Economics, vol.110, pp.641-80.|
Actions (login required)