The Roots Of The 1997 Asian Financial Crisis

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As mentioned in previous sections, a main root of the 1997 Asian Financial crisis is the structural weaknesses and inadequate monetary policy by Asian governments. This paper will discuss three important central bank institutional features - central bank independence, central bank transparency and inflation targeting – and examine whether these features changed after the financial crisis and their impact in terms of helping Asian economies transform into healthier situations post-crisis.

4.1 Central Bank Independence

Prior to the 1997 crisis, monetary policy in Asian countries was believed to be largely controlled by the government with strong political incentives to inflate the economy. Indeed, evidence has shown that central bank
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An enhanced level of central bank independence in Asian countries has been promoted through amendments of central banking laws. South Korea redesigned its financial system in late 1997 and revised The Bank of Korea Act in December that year, making Bank of Korea an independent central bank free from the influence of the Ministry of Finance in the conduct of monetary policy (Cargill 2001). Indonesia and Thailand also enacted new central bank law in the early 2000s, giving central bank higher level of legal independence (Filardo and …show more content…
al (2008). This CBIG index focuses solely on Asian countries and covers the time period of 1996-2005, taking the Asian financial crisis period into consideration. Figure 3 in the Appendix shows the overall value of the CBIG index for two years, 1996 and 2005. The first year represents the situation before the Asian financial crisis and the second, though it does not cover 2006-2007, is the latest value available in the Ashan et. al index. The graph reports that the level of central bank independence has increased in all crisis-affected countries in the post-crisis period. In addition, the study also indicates that the level of inflation in Asian countries has dropped sharply post-crisis and the result of their regression model exhibits a significant relationship between increasing level of central bank independence and inflation

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