Dornbusch on contagion
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Dornbusch on contagion

Asia may be bouncing back. But apprehension was in the air when the IMF, the World Bank and the Asian Development Bank convened a conference in Washington to discuss financial contagion. Rudiger Dornbusch, MIT's celebrated international economist, was one of the prime movers for this event. He talked to James Smalhout.

Would the official community have reacted any differently to the Asian crisis in July 1997 had we known then what we know now about financial contagion?

No, I think that the research shows two things of interest. First, every one of those economies had horrible balance sheets and with an accident you're going to get a big fallout.

The fallout gets aggravated by lack of liquidity, by a lack of knowing what is happening next in politics, by a question of whether the government will choose to default rather than have a serious fiscal impact in the budget that is politically unpopular.

All of that, I think, is well documented and leaves the policy question of whether you should intervene or not. The answer always is: when it's big, intervene. I think that will remain the answer.

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