Effect of the Asian Financial Crisis of the Late 1990s on OECD Countries Table 17.5 provides estimates of the effect of the financial crisis that started in Asia in July 1997 on the United States, Japan, the European Union, Canada, Australia, and New Zealand, which were made by the Organization of Economic Cooperation and Development (OECD) using its INTERLINK model. The financial crisis in Asia was transmitted through trade linkages to other nations and regions of the world. Specifically, the depreciation of the currencies of the nations in crisis stimulated their exports, while the reduction in their GDP reduced the demand for their imports. The effects are given in terms of reduced growth and worsened current account balance of other nations from what they would have had in the absence of the crisis. The table shows that the financial crisis in Asia reduced the growth of real GDP in the United States by 0.4 percentage points in both 1998 and 1999 (from 4.7 percent to 4.3 percent in 1998 and from 4.2 percent to 3.8 percent in 1999). This amounted to about $34–$35 billion reduction in the GDP of the United States in 1998 and 1999. The reduction in growth (in percentage points) was similar in the European Union, but much greater for Japan, Australia, and New Zealand, and smaller in Canada. The table also shows that the crisis increased the current account deficit of the United States by $13 billion in 1998 and by $27 billion in 1999. The effect was similar in Japan and the European Union, but much smaller in Canada, Australia, and New Zealand. Thus, we can see that economic crises in some large nation or economic area can easily spread to other nations and areas through trade linkages and have a significant impact on them. This is even more evident from the financial crisis that started in the U.S. subprime mortgage market in 2007 and then spread to the entire financial and economic sectors of the United States and the rest of the world in 2008 (discussed in detail in Section 21.6e).
CASE STUDY 17-5
Effect of the Asian Financial Crisis of the Late 1990s on OECD Countries
Table 17.5 provides estimates of the effect of the financial crisis that started in Asia in July 1997 on the United States, Japan, the European Union, Canada, Australia, and New Zealand, which were made by the Organization of Economic Cooperation and Development (OECD) using its INTERLINK model. The financial crisis in Asia was transmitted through trade linkages to other nations and regions of the world. Specifically, the
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