A. What Happened?
The Asian countries have been the victims of their own success. Until the 90’s, their economic performances were so high that it was hard to believe that it could collapse in only few years. When the problems started, they refused to admit them. They thought that they were under cover of the same economic crisis than the LatinAmerican one because they were not face to large budget deficits, or to the burden public debt or to the rapid monetary expansion. And Asian countries have started to seriously take care of their problems too late.
The causes of the Asian crisis have been clearly identified.
First, substantial amounts of foreigners’ funds found themselves available to interest rates relatively low when investorslooking for new opportunities have shifted massively capital of Asia.
As in any phase expansion, stock prices and real estate from Asia soared, attracting more funds. But the interior allocation of these borrowed foreign resources was inefficient because of the fragile banking systems, of the Government and Business and because of the lack of transparency in the financial sector. The limitedabsorptive capacity of these countries also contributed to the inefficient allocation of foreign capital.
Second, countries pursued a fixed exchange rate who gave a false sense of security to borrowers, encouraging them to incur debts in dollars.
Third, in countries affected by the crisis, exports were low in the mid 90s for some number of reasons, including the U.S. dollar against the yen, thedevaluation of the yuan by China in 1994 and the lost of some markets with the entry into force of the North American Free Trade Agreement (NAFTA). The large capital inflows and the weakening of exports have resulted in an increase deficits current account. To worsen the situation, a substantial share of capital inflows was form of short-term debt, exposing the country to external shocks. Clearly, inhindsight, that these countries were at the disaster; the only question was which would cause the debacle. When the crisis erupted in Thailand in July 1997 Asian countries became all vulnerable. And markets overreact, thinking that if this crisis could happen in Thailand, it was inevitable that the same thing happens in other Asian countries that were struggling, to varying degrees, with the sameproblems - financial systems and corporate governance deficient large current account deficits and heavy debt outside. Creditors withdrew their capital from the region and the crisis spread. It was a huge inflation.
The IMF was called to help. Initially, the most urgent was to provide Asian adequate funding for address the shortage of liquidity due to the sudden release of capital and the collapseof their currencies and to restore confidence in the market. The IMF gave the largest loan in its history while mobilizing financing additional to other countries in the region.
B. Monetary Policy
Since the crisis first erupted with the collapse of Asian currencies, monetary policy was a key element of the reform programs. Curiously, programs have been criticized a lot: some said that thecountry should have further raise interest rates; while for other rising interest rates was the main source of future problems.
A number of theorists argued that in times of recession, the traditional approach would be to lower interest rates and let the currency depreciate to boost the economic activity. But currency depreciation during the crisis has been staggering - The Korean currency fell toless than 1,000 won around 2,000 won to $ 1 on a month only. In extreme situation, priority must be to stabilize the exchange rate before any inflationary spiral locks. From the moment you leave the domestic prices fly, it becomes very expensive to proceed to closer money required to restore price stability. The strategy pursued by Asian countries has been to raise interest rates in the short...