Causes of the 1997 Asian Financial Crisis: What Can an Early Warning System Model Tell Us?

Abstract

This brief summarizes major findings of an empirical study that attempts to test the two hypotheses to determine what actually happened in Asia in 1997 using an early warning system (EWS) model (Zhuang and Dowling 2002). EWS models are useful in discriminating between the two hypotheses because they establish 'crisis-triggering' threshold values for economic and financial indicators using historical data. Strong warning signals of a heightened probability of a financial crisis prior to the 1997 crisis from such models would suggest that there are good reasons to believe the crisis was caused more by weak fundamentals than by investor panic.