Working Paper: NBER ID: w7102
Authors: Frederic S. Mishkin
Abstract: This paper provides an asymmetric information analysis of the recent East Asian crisis. It then outlines several lessons from this crisis. First, there is a strong rationale for an international lender of last resort. Second, without appropriate conditionality for this lending, the moral hazard created by operation of an international lender of last resort can promote financial instability. Third, although capital flows did contribute to the crisis, they are a symptom rather than an underlying cause of the crisis, suggesting exchange controls are unlikely to be a useful strategy to avoid future crises. Fourth, pegged exchange-rate regimes are a dangerous strategy for emerging market countries and make financial crises more likely.
Keywords: East Asian financial crisis; asymmetric information; moral hazard; adverse selection; financial regulation
JEL Codes: F30; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Deterioration of bank balance sheets (F65) | East Asian financial crisis (F65) |
| Excessive lending boom (F65) | Deterioration of bank balance sheets (F65) |
| Financial liberalization (F30) | Excessive lending boom (F65) |
| Deterioration of bank balance sheets (F65) | Restricted lending (G21) |
| Restricted lending (G21) | Broader economic contraction (F69) |
| Deterioration of bank balance sheets (F65) | Currency crisis (F31) |
| Currency crisis (F31) | Financial crisis (G01) |
| Currency devaluation (F31) | Firms' balance sheets (G32) |
| Rise in inflation expectations (E31) | Firms' balance sheets (G32) |
| Foreign currency liabilities (F31) | Banks' balance sheets (G21) |