The Asian Crisis

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The Asian Crisis
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Causes and CuresIMF Staff
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• Pegged exchange rates seen as guarantees of
  exchange value.
• Bubble values in stocks and real estate developed
  as currencies became overvalued.
• Inadequate supervision of financial system
• Export slowdowns in 96, 97.
• When the bubble burst (rapid withdrawal of
  investments, decline of currency values), IMF
  gave support packages of almost 100 billion.

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• In Indonesia, Korea, and Thailand authorities
  initial hesitation in introducing reforms and in
  taking other mesures to restore confidence led to
  a worsening of the crisis by causing declines in
  currency and stock marketswere greter than a
  reasonable assessment of economic fundamentals
  might have justified. This overshooting in
  financial markets worsened the panic.

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• Appropriate strategies
• Monetary policy mustresist excessive currency
  depreciation (p. 408). (Read, raise interest
  rates!)
• Since this is a financial crisis, restructure
  financial institutions
• Improve governance. Strengthen transparency and
  accountability.

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• What is moral hazard?
• P/A problem of divergent incentives. If the agent
  isnt monitored, he pursues his personal, not
  contractual, interests. This usually involves at
  least shirking.

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• What is moral hazard?
• IMF moral hazard exists when the provision of
  insurance against a risk encourages behavior that
  makes the risk more likely to occur.
• In the case of IMF lending, concern about moral
  hazard stems from a perception that such
  assistance might weaken policy discipline and
  encourage investors to take on greater risks in
  the belief that they will onlyh partially suffer
  the consequences if their investments sour. (p.
  409)

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• The Key IMF Response
• The experience of the Great Depression taught
  policymakers that the damage caused by systemic
  financial crises can be devastating and can have
  a global impact. This justifies a public policy
  role in avoiding deep and damaging crisis.
• What does this mean for the Asian Crisis?