The East Asian Financial Crisis: A Year Later*

This paper analyzes the causes and consequences of the financial crisis in East Asia. We have examined which of the two alternatives--panic or fundamentals--was a crucial feature. While our empirical analysis is inconclusive on the relative importance of the two views, it suggests that the massive inflow of foreign capital into the region during the 1990s was at the center of the East Asian financial difficulties. We have also empirically investigated whether the East Asian crisis was contagious, and found evidence on the spillover of the currency crisis in Thailand and Indonesia into Korea as well as the spillover of the Korean currency crisis into these two countries. In addition, we have examined three causes of crisis contagion: macroeconomic similarities, financial market integration and trade linkages. Our analysis shows that trade links partly explain the crisis contagion among the East Asian economies and that macroeconomic similarities have contributed to the spreading of the Thai crisis to Southeast Asian countries, but not necessarily to Taiwan and Korea. Our empirical tests also suggest that international institutional investors were responsible for spreading the contagion in the East Asian crisis.