... the product of budget deficits: it is the ultimately uncontrollable need of the government for seignorage to cover its deficit that ensures the eventual collapse of a fixed exchange rate, and the efforts of investors to avoid suffering capital losses (or to achieve capital gains) when that collapse occurs provoke a speculative attack when foreign exchange reserves fall below a critical level. If first-generation models are applicable to the East Asian experience, then the crisis was the result of a fundamental inconsistency between domestic policies-the persistence of money-financed budget deficits-and the attempt to maintain a fixed exchange rate. The inconsistency was temporarily papered over as the central banks of the region had sufficiently large reserves, but when these reserves became inadequate speculators forced the issue with a wave of selling. Therefore the East Asian crisis could have been prevented if consistent policies were pursued. However the fundamental problems stressed by ...

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