Asset Bubbles, Leverage and ‘Lifeboats’: Elements of the East Asian Crisis

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Abstract

Collapsing credit markets have been blamed for the depth and persistence of the Great Depression in the United States. Could similar mechanisms have played a role in ending the East Asian economic miracle – and in creating fragility in global financial markets? After a brief account of the nature of the East Asian crises of 1997/8, we use the framework of highly-leveraged, fully-collaterised firms due to Kiyotaki and Moore (1997) to explore the impact of a credit crunch. The paper emphasises the fragility of equilibrium and how rapidly boom can turn to bust.

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