Moral hazard, asset price bubbles, capital flows, and the East Asian crisis: the first tests

We examine the view that the recent East Asian crisis was precipitated by bursting asset price bubbles, which had been fuelled by strong capital inflows that were largely the result of a moral hazard problem in financial intermediation, and was exacerbated by a vicious cycle of asset price deflation and incipient and actual capital flight. We find evidence of stock market bubbles in all East Asian economies examined, although not in Australia. We examine various categories of capital flows to these countries and find, in particular, relatively high reversible components in portfolio flows to East Asian economies. (C) 1999 Elsevier Science Ltd. All rights reserved. JEL classification: E44; F20; F34; G1.