Financial Crises in Light of the Asian Experience: Some Theoretical Reconsiderations

The recent financial crises in several emerging market economies only confirm that a satisfactory explanation of financial and currency crises remain elusive. The first-generation crisis model pioneered by Krugman is no longer compelling as many of the actual crises seem to lack the crucial fiscal disequilibriums. Similarly, Obstfeld's "second generation" model, while appropriate for the European Rate Mechanism is at odds with the Mexican peso and Asian crisis. This paper reviews the various currency crisis models to understand the conditions under which an economy can become vulnerable to a currency crisis. Specifically, it argues that the Asian crisis can be best understood from the lenses of the evolving third-generation models.