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4-21 - The Asian Financial Crisis Two theories fundamentals...

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The Asian Financial Crisis Two theories: fundamentals vs. panic Did not go to other places in the world Real-side vs. financial linkages In crisis, financial linkages much more important Direct vs. indirect linkages Contagion – July 4, 1997 – Thailand crisis starts Goes to Indonesia, skips Philippines – had undergone a number of reforms – few Japanese banks invested there October – Taiwan devalued NTD, caused second round of devaluation Korea then collapsed July-December 1997: 800 won to 2000 won 2400-1500 rupiah Stock markets fell 50% Huge decline in output A lot of political and social unrest Question: when everything is collapsing, what should happen? – stabilizing speculation 1. Asian governments consistently released misleading information 2. IMF programs very unpopular a. Budget reform unpopular b. Bank reform very expensive China did not devalue Ham-handed IMF depressed activity, value of assets IMF had experience mostly in Latin America and Turkey Current account crises made currency peg unsustainable, caused by domestic budget problems Raise taxes, balanced budgets, strict money, etc. But Asian countries had financial system problems, not macroeconomic problems dd 1. Recall: two theories of devaluation a. Fundamental b. Panic 2. Real-side vs. financial linkages a. In crisis, financial linkages much more important 3. Direct vs. indirect linkages 4. Contagion 5. Outline of the crisis a. July 4, 1997: crisis starts in Thailand b. Spreads to Indonesia – but skips Philippines i. Philippines had implemented reforms beforehand
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ii. Also, Japanese banks did not invest in Philippines as much, thus not as affected by withdrawal of funds c. dd 6. See above 7. International response?
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