asian_crisis

asian_crisis - EAST ASIAN FINANCIAL CRISIS OF 1997 HAKAN...

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1 EAST ASIAN FINANCIAL CRISIS OF 1997 HAKAN YILMAZKUDAY The crisis that took place in the late 1990s in Asia rekindled interest in financial crisis. The role of the financial sector and is observed to be the main reason for Asian financial crisis. Since currency crisis and financial crisis are closely related in the sense of causality, one should take into account the relation between them when analyzing Asian crisis. Instead of sticking with only one explanation for the link between financial and currency crises, Kaminsky and Reinhart (1999) classify the models of this link in three groups. One chain of causation runs from balance of payments problems to financial crisis. An external shock, such as an increase in foreign interest rates, coupled with a commitment to a fixed parity, will result in the loss of reserves, because agents will find it more profitable to invest in foreign countries. Within this group, Goldfajn and Valdes (1997) explain the link between the those crises as follows. Deposits at domestic banks are part of the domestic liabilities that investors will attempt to convert into reserves in a currency crisis. If not sterilized, this will lead to a credit crunch, increased bankruptcies and financial crisis. Thus, a run on the currency is typically associated with a run on the financial system. The second group models point to the opposite causal direction: financial sector problems give rise to the currency collapse. Such models stress that when central banks finance the bailout of troubled financial institutions by printing money, a currency crash prompted by excessive money creation will occur. Saxena and Wong (1999), and Burnside,
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