Latin America and East Asia in the context of an insurance model of currency crises
1999
Chinn, Menzie David | Dooley, Michael P. (Michael Patrick) | Shrestha, Sona
This paper focuses on the 1995 Latin American and 1997 East Asian crises using an insurance-based model of financial crises. First the model of Dooley (forthcoming) is described. Second, some empirical evidence for an insurance model is presented. The key variables in this approach include the ratio of foreign exchange reserves to bank loans (domestic credit) extended to the private sector, the ability of the private sector to appropriate government assets, and appropriation as measured by capital flight. We argue that the insurance model is consistent with the observed evolution of these variables in the recent crises in Latin America and Asia. Finally, we examine the statistical evidence in favor of the model using panel regressions. We find that the econometric results are consistent with the insurance model, and tend to support this approach over some competing explanations.
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Publisher National Bureau of Economic Research | Cambridge, MA : National Bureau of Economic Research, ©1999
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