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The Causes, Effects and Lessons of the 1997 East Asian Financial Crisis

Zara Ahmed
Julia Dreier
Frank Ro

April 9, 2007
FSPP 556: Macroeconomics
Professor Kathryn Dominguez


Introduction Following its independence in 1945, the Indonesia economy deteriorated drastically as a result of political instability, a young inexperienced government, and ill-disciplined economic nationalism. However, the New Order administration in the 1960s, brought about a new degree of discipline to economic policy that quickly brought inflation down, managed foreign debt, but more importantly, attracted foreign investment through financial liberalization. As massive inflows of foreign investment poured into the country, problems soon arose with regulation and oversight. These structural weaknesses created instability and ultimately multiplied the effects of the Asian Financial Crisis in 1997. With strong encouragement of the IMF, Indonesia adopted a set of policies to protect currency values and penalize insolvent companies, in order to restore investor and creditor confidence in the country. Despite assistance from the International Monetary Fund, the Crisis devastated the Indonesian economy and brought on massive social unrest. This paper consists of six parts. We intend to analyze pre, during, and post-crisis trends utilizing such macroeconomic models as the Mundell-Fleming model, the IS-LM model, and the open economy model for calculating exchange rates. First we provide a brief overview of the Asian Financial Crisis. The second part of the paper analyzes why the crisis happened; moreover, what policies lead to the crisis. Third, we provide an in depth examination of Indonesia’s response to the crisis. Forth, we evaluate what went wrong with Indonesia’s macroeconomic response to the crisis through the models. Fifth, we examine…...

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