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Economic Quarterly

Spring 2000

How the Asian Crisis Affected the World Economy: A General Equilibrium Perspective

Wenli Li, Xinshen Diao and Erinc Yeldan

Two years and more have passed since the outbreak of the East Asian Financial crisis in 1997. Although international economic and financial conditions deteriorated somewhat in the wake of the crisis, the world economy escaped a “global slump.” Using an intertemporal general equilibrium model in which commodity trade and capital flows link regions and propagate shocks, the authors show that the effects of the crisis were distributed unevenly across nations. Other developed countries suffered the largest blow. Industrial economies, however, went largely unscathed as the crisis impinged but little on them; indeed, they even experienced a boost at the start of the crisis. It follows that fears of adverse effects on industrial economies were largely unjustified.

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