TY  - JOUR
AU  - Chang,Roberto
AU  - Velasco,Andres
TI  - The Asian Liquidity Crisis
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6796
PY  - 1998
Y2  - November 1998
UR  - http://www.nber.org/papers/w6796
L1  - http://www.nber.org/papers/w6796.pdf
N1  - Author contact info:
Roberto Chang
Rutgers University
Department of Economics
75 Hamilton Street
New Brunswick, NJ  08901
Tel: 732/932-7269
Fax: 732/932-7416
E-Mail: chang@econ.rutgers.edu

Andres Velasco
Columbia University
School of International and Public Affairs
420 West 118th Street
New York, NY 10027
Tel: 212/854-3899
E-Mail: avbranes@gmail.com
AB  - A country's financial system is internationally illiquid if its potential short term obligations in foreign currency exceed the amount of foreign currency it can have access to in short notice. This condition may be crucial for the existence of financial crises and/or exchange rate collapses (Chang and Velasco 1998a, b).  In this paper we argue that the 1997-98 crises in Asia were in fact a consequence of international illiquidity.  This follows from an analysis of empirical indicators of illiquidity as well as other macroeconomic statistics.  We trace the emergence of illiquidity to financial liberalization, the shortening of the foreign debt structure, and the currency denomination of assets versus liabilities.  We explain how financial crises became exchange rate collapses due to a government policy of both fixing exchange rates and acting as lender of last resort.  Finally, we outline the policy implications of our view for both preventing crises and dealing with them.
ER  -