The East Asia Crisis: Investigating Causes and Policy Responses

Warwick J. McKibbin and
Warwick McKibbin
Warwick J. McKibbin Former expert - Economic Studies, Center on Regulation and Markets, Distinguished Professor of Economics & Public Policy - Crawford School of Public Policy, The Australian National University

Will Martin
Will Martin Senior Research Fellow, Markets, Trade, and Institutions Division - IFPRI

February 1, 1999


In this paper, we examine the potential causes of the East Asian crisis, and identify the primary cause of the crisis to be a fundamental reassessment of the profitability of investment in the region. A number of secondary shocks are also identified, including interest risk premia, monetary expansion and output declines brought by financial market failure. We use a forward looking modeling framework to capture some of the major interactions between asset markets, output and trade, and find that it is able to capture the main features of the crisis. Policy responses are examined, and temporary fiscal expansion is found to be generally preferable to monetary expansion or to permanent fiscal expansion.