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Abstract

The evidence is examined that excessively liberal monetary policy by the Bank of Japan, before and after the financial collapse of Japan in 1992, may have led other East Asian economies into “over-borrowing” and speculative investments, prior to the currency crisis in 1997–98. The authors test for cointegration and Granger causality between Japanese money supply M1 and the domestic investment of eight East Asian economies and Australia. US and German money supplies are also used as a benchmark. There is strong evidence that there are long- and short-run causal relationships between the Japanese money supply and the domestic investment of the Asian crisis-inflicted economies prior to 1997.