asia crisis 9900
TRANSCRIPT
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International Financial Crises
What happened in Asia?
Globalization, 17.195
R. Bonoan & J. Shapiro
November 21, 1999
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Government policies towardthe financial system
• Bank-centered financial system
• Weak bank supervision
• Moral hazard (Banks used asinstrument of public policy and toobig to fail)
Governmentpolicies towardforeign capital
• Capital accountliberalization biasedtoard short-termcapital
• !oreign capital usedto finance public debt
Misallocation of capital• "verinvestment• #sset price bubble
• Corruption
Financial
vulnerability• $o banking crisis
• $o public debt crisis
Debt MaturityStructure
• #ccumulation of short-term debt denominated inforeign currency
Crisis• %peculative attack oncurrency
• Capital outflo
• %pectre of public debtdefault
Governmentmacroeconomic policy
• !i&ed e&change rate
• 'oose fiscal policy(persistent budget deficits)
Macroeconomicvulnerability
• igh relative inflation causedby e&pansion of money supply
• eal e&change-rateappreciation
• Widening of current accountdeficit
Triggers• *epletion of foreigne&change reserves
• +conomicvulnerabilitiesrevealed
• Credibility of fi&ed
e&change rateundermined
Triggers • +conomicvulnerabilitiesrevealed
• Credibility of fi&ed
e&change rateundermined
International Financial Crises
1. Vulnerabilities & Triggers
Causes of foreign capital inflow• +&pansionary monetary policy in money centers• +&cess orld li,uidity (orld capital glut)• !inancial deregulation• igher interest rates relative to money centers• 'iberalization of capital account
Inflow of foreign capital
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Financial system furtherweakened
• igh interest rates force borroersinto default
• %pecter of bank bailout
• Credibility of fi&ed e&change ratefurther undermined
Domestic economywea
kens• Bankruptciesbankcollapses
• .ncreasing unemployment
• ising political unrest
Crisis
• %peculative attack on currency
• Capital outflo
• %pectre of public debt default
Incentives to devalueincrease
• Credibility of fi&ed e&changerate further undermined
2. International Financial Crises
Government Response and Feedback Mechanisms
Depletion of foreignechange reserves• Credibility of fi&ed
e&change rate furtherundermined
Governmentraises domesticinterest rates
!change rate pegun
der pressure
•Macroeconomic imbalances
•Competitive devaluation
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Government policies towardfinancial system
• Bank-centered financial system
• Weak bank supervision
• Moral hazard (Banks used asinstrument of public policy and toobig to fail)
Misallocation of capital
• "verinvestment
• #sset price bubble (real estate)
• Corruption
Financialvulnerability
• $o banking crisis
• /ublic debt crisis
Crisis
• %peculative attack oncurrency
• Capital outflo
Triggers • +conomic vulnerabilitiesrevealed (bank collapses0corruption e&posed)
• Credibility of fi&ede&change rate undermined
The Asian Financial Crisis
3. “Crony Capitalism”
Causes of foreign capital inflow• +&pansionary monetary policy in moneycenters (1%2 +urope2 and 3apan)
• +&cess orld li,uidity (yen bubble)
• !inancial deregulation in +urope
• igher interest rates in #sian countriesrelative to money centers
• #sian countries liberalize capital accounts
Inflow of foreign capital
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“Crony Capitalism”
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Inflow of foreign capital
Government policiestoward foreign capital
• Capital accountliberalization biased toardshort-term capital
Financial vulnerability
• $o banking crisis
Debt MaturityStructure
• #ccumulation of short-term debt denominated inforeign currency
Crisis
• %peculative attack oncurrency
• Capital outflo
The Asian Financial Crisis
4. Short-term Capital Flows(South Korea)
Triggers
• +conomic vulnerabilitiesrevealed (collapse ofchaebol 0 revelation of trueshort-term debt burden)
• Credibility of fi&ed
e&change rate undermined
Causes of foreign capital inflow• +&pansionary monetary policy in moneycenters (1%2 +urope2 and 3apan)
• +&cess orld li,uidity (yen bubble)
• !inancial deregulation in +urope
• igher interest rates in #sian countriesrelative to money centers
• #sian countries liberalize capital accounts
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Short-term Capital Flows
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Crisis
• %peculative attack on currency
• Capital outflo
Government macroeconomicpolicy
• !i&ed e&change rate (dollar peg)
Macroeconomic vulnerability
• igh relative inflation caused by e&pansionof domestic money supply
• eal e&change-rate appreciation (alsobecause dollar strengthening)
• Widening of current account deficit
Triggers
• *epletion of foreign e&change reserves
•+conomic vulnerabilities revealed (realestate bubble bursts and Bangkok Bank
of Commerce fails)• Credibility of fi&ed e&change rateundermined
The Asian Financial Crisis
5. Macroeconomic Fundamentals(Thailand)
Causes of foreign capital inflow
• +&pansionary monetary policy in moneycenters (1%2 +urope2 and 3apan)
• +&cess orld li,uidity (yen bubble)
• !inancial deregulation in +urope
• igher interest rates in #sian countriesrelative to money centers
• #sian countries liberalize capital accounts
Inflow offoreign
capital
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Macroeconomic Fundamentals
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• Multiple variables to consider
• Variance across countries– Not all factors were present in all countries
• Triggers were important– Vulnerabilities not sufficient to cause crisis
• Several paths to crisis– Was the crisis inevitable?
– How much weight should be assigned to each path?
Conclusions