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Mr. David T. Coe and Mr. Se-Jik Kim

Anne O. Krueger and Jungho Yoo * Despite the similarities among the countries hit by the Asian financial crisis of 1997, there were some differences. Among them, there were allegations that Korean chaebol had misallocated resources and become overindebted; by contrast, the role of “crony capitalism,” in which friends and relatives of the politically powerful received loans that they were not expected to repay, was a focal point. A number of factors contributed to the crises, and there is no broad consensus as to their relative importance. “Crony,” or

Mr. Yi Wu
This paper is a theoretical study of the impact of institutional quality on currency crises from a public finance point of view. Recent empirical studies leave little doubt that weak institutions, including high levels of corruption, hinder economic performance. After the East Asian crisis, many observers have pointed to widespread corruption and crony capitalism as an underlying cause. Despite the popularity of the claim, there are only limited empirical and especially theoretical studies on the link between institutional quality and currency crises. This paper intends to fill in this void. We model institutional weakness as an inefficiency of the tax collection system. The model derived here shows that institutional weakness generally increases the likelihood of the existence of a self-fulfilling crisis equilibrium, and leads to larger currency devaluation when crises happen. However, this relationship could reverse when institutional weakness is very severe.
Mr. Yi Wu

I. I ntroduction This paper is a theoretical study of the impact of weak institutions on currency crises from a public finance point of view. Recent empirical studies leave little doubt that weak institutions, including high levels of corruption, hinder economic performance (see, for example, Mauro, 1995 ; Wei, 2000a ; Acemoglu et al., 2001). Countries with weak institutions are found to invest less, attract less foreign direct investment, and grow more slowly. After the East Asian crisis, many observers have pointed to widespread corruption and crony