1. The Asian Crisis

2. Causes and Cures IMF Staff

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

4. 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 markets…were greter than a reasonable assessment of economic fundamentals might have justified. This overshooting in financial markets worsened the panic. 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 markets…were greter than a reasonable assessment of economic fundamentals might have justified. This overshooting in financial markets worsened the panic.

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

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

7. What is moral hazard? 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.” 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)

8. The Key IMF Response 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.” “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? What does this mean for the Asian Crisis?