A Krugman-Dooley-Sachs Third Generation Model of the Asian Financial Crisis.
This paper presents a multiple-equilibrium model of the Asian financial crisis. The economy has Krugman-style over-investment caused by weak financial regulation and exacerbated by government guarantees. Following Dooley, the government only has a limited capacity or willingness to honour such guara...
| Main Authors: | , |
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| Format: | Working paper |
| Language: | English |
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CEPR
1999
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| _version_ | 1797090632279261184 |
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| author | Irwin, G Vines, D |
| author_facet | Irwin, G Vines, D |
| author_sort | Irwin, G |
| collection | OXFORD |
| description | This paper presents a multiple-equilibrium model of the Asian financial crisis. The economy has Krugman-style over-investment caused by weak financial regulation and exacerbated by government guarantees. Following Dooley, the government only has a limited capacity or willingness to honour such guarantees. The model has a unique long-run equilibrium, with over-investment. But in the short run, in which the capital stock is fixed, it also has multiple equilibria. If lenders regard lending as low-risk, then it is. But if they regard lending as high-risk then the cost of honouring guarantees rises, making the lending high-risk and the risk premium self-justifying. We argue that this model usefully captures the ideas of panic and collapse which have been popularised in Sachs' discussions of the Asian crisis. |
| first_indexed | 2024-03-07T03:21:27Z |
| format | Working paper |
| id | oxford-uuid:b791f188-271d-4960-a64b-2f4671864499 |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-03-07T03:21:27Z |
| publishDate | 1999 |
| publisher | CEPR |
| record_format | dspace |
| spelling | oxford-uuid:b791f188-271d-4960-a64b-2f46718644992022-03-27T04:49:38ZA Krugman-Dooley-Sachs Third Generation Model of the Asian Financial Crisis.Working paperhttp://purl.org/coar/resource_type/c_8042uuid:b791f188-271d-4960-a64b-2f4671864499EnglishDepartment of Economics - ePrintsCEPR1999Irwin, GVines, DThis paper presents a multiple-equilibrium model of the Asian financial crisis. The economy has Krugman-style over-investment caused by weak financial regulation and exacerbated by government guarantees. Following Dooley, the government only has a limited capacity or willingness to honour such guarantees. The model has a unique long-run equilibrium, with over-investment. But in the short run, in which the capital stock is fixed, it also has multiple equilibria. If lenders regard lending as low-risk, then it is. But if they regard lending as high-risk then the cost of honouring guarantees rises, making the lending high-risk and the risk premium self-justifying. We argue that this model usefully captures the ideas of panic and collapse which have been popularised in Sachs' discussions of the Asian crisis. |
| spellingShingle | Irwin, G Vines, D A Krugman-Dooley-Sachs Third Generation Model of the Asian Financial Crisis. |
| title | A Krugman-Dooley-Sachs Third Generation Model of the Asian Financial Crisis. |
| title_full | A Krugman-Dooley-Sachs Third Generation Model of the Asian Financial Crisis. |
| title_fullStr | A Krugman-Dooley-Sachs Third Generation Model of the Asian Financial Crisis. |
| title_full_unstemmed | A Krugman-Dooley-Sachs Third Generation Model of the Asian Financial Crisis. |
| title_short | A Krugman-Dooley-Sachs Third Generation Model of the Asian Financial Crisis. |
| title_sort | krugman dooley sachs third generation model of the asian financial crisis |
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