Understanding the Asian Crisis: Systemic Risk as Coordination Failure

摘要: Introduction and summary The vast array of financial regulations in the United States other developed economies is justified largely as a way protecting public from dangers systemic risk or crisis markets. Even title recent General Accounting Office report on derivative regulation ("Financial derivatives: Actions needed to protect system" [GAO, 1994]) images popular press (a close-up snake with jaws wide open cover Fortune magazine) appeal our fear risk. While many different (and often mutually contradictory) characterizations have been proposed, it somewhat disturbing that we lack consensus what, precisely, is. In its most general usage, term describes shock system impairs crucial functions system, such asset valuation, credit allocation, payments.(1) This characterization, however, not too helpful. What sort mechanism can result this impairment? Economists do agree. Proposed answers include: irrational piling-on debt;(2) moral hazard induced by mispriced government-provided deposit insurance;(3) complex relationships among counterparties;(4) an unwillingness dealers trade;(5) failure central bank provide liquidity needed;(6) unpredictable adverse shocks come outside sector;(7) runs.(8) Regardless which characterization one prefers, satisfactory theory requires fully articulated, internally consistent economic model. A rigorous model may leave uncertainty how maps reality, but there be no about what meant within context itself. economists disagree causes nature risk, specific events history are generally recognized examples crisis. event Asian began mid-1997. displays certain textbook characteristics associated crisis: It appeared originate markets; displayed contagion, problems country seeming induce crises countries; was clear evidence confidence loss investors; were substantial real costs output; clearly called for policy response. One aspect more difficult explain using standard theories seemed emerge almost spontaneously. Although, hindsight, point conditions made some East vulnerable disturbance, forecasted knowledgeable observers, nor triggered any commensurate scale upheaval. I argue article neoclassical commonly used analysis poorly suited small impulse induces large change performance. Rather, best explained example coordination failure. Suppose performance (or firm, industry, market) depends numbers investors being willing funds. If believed will withhold funds, rational given investor refrain investing. Thus, these beliefs become self-fulfilling. represents because everyone would better off if all provided funds affected country. Unfortunately, coordinate actions way. article, formalize notion simple static My implies that, Diamond-Dybvig (1983) runs, credible insurance necessary avoid costly …