Financial Contagion in the East Asian Crisis: With Special Reference to the Republic of Korea

Abstract

Over the last three years, there has been a growing amount of literature on the East Asian crisis. A website created by Roubini, for example, lists more than 500 articles on the crisis. Despite the proliferation of studies on the East Asian financial turmoil, the causes of the crisis still remain controversial. Radelet and Sachs (1998), Feldstein (1998), and Stiglitz (1999) argue that the primary source of the crisis was the sudden shifts in market expectations and confidence. According to these authors, foreign lenders and institutional investors were so alarmed by the Thai crisis, which broke out in July 1997, that they abruptly pulled their investments out of the other countries in the region and caused the crisis to be contagious. Their withdrawal was prompted by the belief that these countries suffered from similar structural problems as those causing a speculative attack on Thailand.

The authors would like to thank Peter Montile and the participanta of the Conference on International Finance Contagion: How It Spreads and How It Can Be Stopped (organized by the World Bank, IMF, and ADB) and KIEP seminar for their valuable comments. The authors are alone responsible for all remaining errors.