Financial Crisis in East Asia: Bank Runs, Asset Bubbles and Antidotes
CSGR Working Paper No. 11/98
42 Pages Posted: 17 Jun 1999
Date Written: July 1998
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.
JEL Classification: E65, F41, F42
Suggested Citation: Suggested Citation