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The severity of the 1997-98 Asian currency crisis can be attributed, at least in part, to the interaction of structural weaknesses in the crisis countries and volatile international capital markets, according to New York Fed authors Paolo Pesenti and Cédric Tille.
Pesenti and Tille also find that:
Inadequate supervision of the crisis countries banking and finance sectors contributed to the turmoil.
The rapid transmission of the crisis through structural links and spillover effects among the crisis countries was another contributing factor.
Pesenti and Tille analyze two traditional theories of currency crises. One traces currency instability to countries structural imbalances and weak policies; the other identifies arbitrary shifts in market expectations as the principal source of instability. The authors argue that each theory offers only a partial explanation for the Asian currency crisis, and that only by synthesizing these theories can one capture the severity of the crisis.