The authors investigate the origins of the East Asian crisis and its contagion, examine the channels of contagion, and discuss policy recommendationsThey make detailed recommendations in the context of nine general lessons learned from the East Asian crisis. 1) Preventing crises and contagion: avoid large current account deficits financed through short-term private capital inflows. Aggressively regulate and supervise financial systems to ensure that banks and nonbank financial institutions manage risks prudently. Put in place incentives for sound corporate finance to prevent high leverage ratios and overreliance on foreign borrowing. 2) Managing crises and contagion: In the context of sound policies, mobilize timely external liquidity of sufficient magnitude to restore market confidence. At times of crisis,"bail in"private foreign creditors. When official resources are too limited for the magnitude of the crisis or contagion, and when private creditors are not amenable to coordination, some involuntary private involvement may be needed too. Keep in mind that there is no one-size-fits-all monetary and fiscal stance for responding to crises and contagion. 3) Resolving the systemic consequences of crises and contagion. Move swiftly to establish domestic and international mechanisms for dealing with the assets and liabilities on nonviolable banks and corporations. Cushion the effects of crisis on low-income groups through social policies to ameliorate the inevitable social tensions associated with adjustment. 4) Developing an effective regional financial architecture. Improve mechanisms for preventing, managing, and resolving crises and contagion at the regional level in ways consistent with improvements in the global financial architecture.
