Lessons of the Asian financial crisis : what can an early warning system model tell us?

Using an early warning system model, this paper provides empirical evidence on the causes of the 1997 Asian financial crisis, with a view to shedding light on policy lessons. The model shows that there were warning signals of heightened economic and financial vulnerabilities in each of the five most affected countries prior to the crisis, suggesting that weaknesses in economic and financial fundamentals in these countries played an important role in causing the crisis. The warning signals point to fundamental weaknesses, including real appreciation of domestic currencies, deterioration in current account positions, excessive external borrowing by banks and currency mismatches in their balance sheets, excessive growth of domestic credit, economic slowdown, and burst of asset price bubbles. (Asian Dev Rev/DÜI)