Asset Bubbles, Domino Effects and 'Lifeboats' Elements of the East Asian Crisis

35 Pages Posted: 8 Aug 1998

See all articles by Hali J. Edison

Hali J. Edison

International Monetary Fund (IMF) - Research Department

Pongsak Luangaram

University of Warwick - Department of Economics

Marcus H. Miller

University of Warwick - Department of Economics; Institute for International Economics; Centre for Economic Policy Research (CEPR)

Date Written: March 1998

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 stabilization 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.

JEL Classification: F3, G1, E5

Suggested Citation

Edison, Hali J. and Luangaram, Pongsak and Miller, Marcus H., Asset Bubbles, Domino Effects and 'Lifeboats' Elements of the East Asian Crisis (March 1998). Available at SSRN: https://ssrn.com/abstract=93688 or http://dx.doi.org/10.2139/ssrn.93688

Hali J. Edison (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6946 (Phone)
202-589-6946 (Fax)

Pongsak Luangaram

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom

Marcus H. Miller

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 3048/9 (Phone)
+44 24 7652 3032 (Fax)

Institute for International Economics

1750 Massachusetts Avenue, NW
Washington, DC 20036-1903
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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