TY - JOUR AU - Corsetti,Giancarlo AU - Pesenti,Paolo AU - Roubini,Nouriel TI - Paper Tigers? A Model of the Asian Crisis JF - National Bureau of Economic Research Working Paper Series VL - No. 6783 PY - 1998 Y2 - November 1998 UR - http://www.nber.org/papers/w6783 L1 - http://www.nber.org/papers/w6783.pdf N1 - Author contact info: Giancarlo Corsetti Faculty of Economics Cambridge University Sidgwick Avenue CB3 9DD Cambridge, Cambs United Kingdom Tel: +44(0)1223335235 E-Mail: giancarlo.corsetti@gmail.com Paolo A. Pesenti Federal Reserve Bank of New York 33 Liberty Street New York, NY 10045 Tel: 212/720-5493 Fax: 212/720-6831 E-Mail: paolo.pesenti@ny.frb.org Nouriel Roubini Department of Economics, KMC 7-83 Stern School of Business, New York University 44 West 4th Street New York, NY 10012 Tel: 212/998-0886 Fax: 212/995-4218 E-Mail: nroubini@stern.nyu.edu AB - This paper develops an interpretation of the Asian meltdown focused on moral hazard as the common source of overinvestment, excessive external borrowing, and current account deficits. To the extent that foreign creditors are willing to lend to domestic agents against future bail-out revenue from the government, unprofitable projects and cash shortfalls are re-financed through external borrowing. While public deficits need not be high before a crisis, the eventual refusal of foreign creditors to refinance the country's cumulative losses forces the government to step in and guarantee the outstanding stock of external liabilities. To satisfy solvency, the government must then undertake appropriate domestic fiscal reforms, possibly involving recourse to seigniorage revenues. Expectations of inflationary financing thus cause a collapse of the currency and anticipate the event of a financial crisis. The empirical section of the paper presents evidence in support of the thesis that weak cyclical performances, low foreign exchange reserves, and financial deficiencies resulting into high shares of non-performing loans were at the core of the Asian collapse. ER -