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Asian Currency and Financial Crises: Lessons from Vulnerability, Crisis and Collapse
Author(s) -
Corbett Jenny,
Vines David
Publication year - 1999
Publication title -
world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/1467-9701.00198
Subject(s) - currency , vulnerability (computing) , currency crisis , financial crisis , citation , history , political science , economic history , library science , economics , law , keynesian economics , monetary economics , computer security , computer science
This paper presents an analytical framework for understanding the East Asian crises. We argue that vulnerability was created by the boom and bust incurred under pegged exchange rates, and by liberalisation in the presence of a bank-based financial regime with implicit promises of bail-out. These vulnerabilities were interconnected. Negative shocks precipitated both currency devaluation and financial crisis, and the latter created obligations for the government to bail out the financial sector. The critical"feature which led to collapse was, we argue, the fact that currency depreciation led to a worsening of the financial crisis, due to massive unhedged borrowing in foreign currency, to which the fixed exchange rate regime had led. Financial collapse resulted when the currency devaluation was sufficiently large that those who had lent to the financial system came to believe that government guarantees could not be honoured. This in turn triggered fears of sovereign insolvency, which turned currency depreciation into currency collapse.