From Asian Miracle to Asian Crisis: Why Vulnerability, Why Collapse?

Existing models of currency crisis were powerless to explain what happened. This was not a ‘first generation’ currency crisis brought about by excess budget deficits, as in Krugman (1979). Nor was the crisis caused by a conflict between the austerity needed to defend a fixed exchange and the expansion needed to remove high unemployment, as in Britain’s forced exit from the ERM in 1992 (Eichengreen and Wyplosz 1993). To understand whatever happened to Asia, a new ‘third generation’ analysis has been needed, one which puts crisis in the financial system at centre-stage.