Working Paper: CEPR ID: DP2150
Authors: Lucio Sarno; Mark P. Taylor
Abstract: We examine the view that the recent East Asian crisis was precipitated by bursting asset price bubbles which had been fuelled by strong capital inflows which were largely the result of a moral hazard problem in financial intermediation, and was exacerbated by a vicious cycle of asset price deflation and incipient and actual capital flight. We find evidence of stock market bubbles in all East Asian economies examined, although not in Australia. We examine various categories of capital flows to these countries and find, in particular, relatively high reversible components in portfolio flows to East Asian economies.
Keywords: emerging markets; capital flows; asset market bubbles; east asian crisis
JEL Codes: E44; F20; F34; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strong capital inflows driven by moral hazard perceptions (F65) | formation of asset price bubbles in East Asian economies (E44) |
| sudden reversal of portfolio flows (F32) | financial crisis in East Asia (F65) |
| high reversible components in portfolio flows (F32) | emergence of stock market bubbles (E32) |
| Japan's higher permanent component of portfolio flows (F32) | protection against financial crisis (G28) |
| moral hazard perceptions (D82) | strong capital inflows (F32) |