Collapsing credit markets have been blamed for the depth and persistence of the Great Depression in the United States. Could similar mechanisms have played a role in ending the East Asian economic miracle – and in creating fragility in global financial markets? After a brief account of the nature of the East Asian crises of 1997/8, we use the framework of highly‐leveraged, fully‐collaterised firms due to Kiyotaki and Moore (1997) to explore the impact of a credit crunch. The paper emphasises the fragility of equilibrium and how rapidly boom can turn to bust.
This paper analyzes how the decisions of individuals to have children and acquire skills affect long-term growth. We investigate a model in which technical progress, human capital, and population arise endogenously. In such an economy, the presence of distortions (such as monopolistic competition, knowledge spillover, and duplication effects) leads the decentralized longrun growth to be either insufficient or excessive. We show that this result depends on the relative contribution of population and human capital in the determination of long-term growth, i.e., on how the distortions affect the tradeoff between the quantity of offsprings and the quality of the family members.
Abstract:Credit market imperfections have been blamed for the depth and persistence of the Great Depression in the USA. Could similar mechanisms have played a role in ending the East Asian miracle? After a brief account of the nature of the recent crises, we use a model of highly levered creditconstrained firms due to Kiyotaki and Moore (1997) to explore this question. As applied to land-holding property companies, it predicts greatly amplified responses to financial shocks -like the ending of the land price bubble or the fall of the exchange rate. The initial fall in asset values is followed by the 'knockon' effects of the scramble for liquidity as companies sell land to satisfy their collateral requirementscausing land prices to fall further. This could lead to financial collapse where -like falling dominoesprudent firms are brought down by imprudent firms.Key to avoiding collapse is the nature of financial stabilisation policy; in a crisis, temporary financing can prevent illiquidity becoming insolvency and launching 'lifeboats' can do the same. But the vulnerability of financial systems like those in East Asia to short-term foreign currency exposure suggests that preventive measures are also required.Keywords: Credit market imperfections, asset price bubbles, financial crisis, illiquidity and insolvency. JEL Classification: E32, G21, G32, G33, and O54 Address for correspondence:Marcus Nontechnical Summary:The East Asian crisis; origin and characterIn early 1997 Korea, Indonesia, and Thailand had completed another year of rapid growth; and all three countries enjoyed a record of outstanding growth and trade performance. There were some signs of a slowdown, with large current account imbalances and stock markets past their peak, but there was no clear warning of impending financial disaster. By the end of the year all three were in the throes of severe financial crises, as reflected in the one third fall in their share prices and the collapse in the value of their currencies (by about two thirds against the dollar) despite emergency funding from the IMF.The paper begins with brief background details on the Asian crisis, its origins and nature. While it was triggered by speculative attacks on the over-valued currencies, the crisis involved a vicious downward spiral in other financial markets. The purpose of this paper is to show how the scramble for liquidity in credit-constrained markets can rapidly turn financial boom into bust. The approach adopted here (and in earlier work on which it is based) is much the same as Krugman (1998), who observes that, to understand the crisis in Asia, one must focus on the role of financial intermediaries and the price of land and other assets.In a globally integrated environment, with strong growth and large capital inflows (as in East Asia), credit market effects can be more pronounced than in closed economies, as capital inflows give banks and near-banks a larger supply of funds to intermediate. The lax regulation of financial institutions in East Asia meant that poor inve...
Abstract: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. Non-Technical Summary:No one can deny the outstanding success of the East Asian economies in the last two decades of rapid economic growth backed by surging capital inflows. Key questions posed by the current crisis are: what went wrong, and why? how to fix it? and, how to prevent a recurrence? To answer them, the paper begins with a brief overview of recent developments in the miracle economies of East Asia, focusing mainly on Korea, Indonesia and Thailand. We focus too on some of the shadows that came to darken the glittering success story -on declining competitiveness and growing financial vulnerability; and on regulatory failures in banking. Then we take a leaf from Charles Kindleberger's book (1996) on Panics, Manias and Crashes and discuss -with historical precedents -various types of financial crisis: speculative attacks on pegged exchange rates, asset bubbles, stock market crashes and bank runs. Based on the distinction between illiquidity , due to a shortage of cash, and insolvency arising from a failure of economic prospects, we go on to outline three main views of the current crisis.First that it was simply due to reversal of capital flows, to a failure of collective action on the part of creditors which could and should have been solved by supplying extra liquidity -or by forcing creditors to rollover their loans. Second the view that the miracle had grown into a bubble that finally had to burst: so the problem was essentially one of insolvency. Finally the view that we prefer, that the panic was not wholly groundless (and rescue efforts were bound to be difficult) mainly because weak regulation combined with implicit deposit guarantees had left local bankers free to gamble with the money that global capital markets had poured into their parlours. Panic set in when foreign depositors realised that there were not enough dollar reserves left for the guarantee to be credible. This account (championed most notably by Paul Krugman of MIT) involves both illiquidity and i...
How do domestic political conflicts affect capital flows into Thailand? This article advances the current understanding in two ways. First, it adopts a new method for measuring political uncertainty using Thai-language newspapers over the past 20 years. Given that the nature of political conflicts is multi-faceted, these measures cover the various key components of Thai political tensions—both within and outside of parliament. Second, how different types of tensions affect capital flows are examined using a quantile regression framework—allowing an examination of effects upon the overall distribution of capital flows. The empirical results indicate that Thai political conflicts significantly and adversely affect both foreign direct investment and foreign portfolio investment at the left tails of their distribution. The results also highlight how different types of political conflicts affect capital flows in different ways. For example, uncertainty about a military coup and government measures regarding martial law or emergency decrees have a strong negative effect upon foreign direct investment flows; whereas heightened political protest and news about constitutional reform play a significant role in explaining the risk reversal of foreign portfolio investment flows.
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