Abstract
The second generation model, which emphasizes multiple equilibria and self-fulfilling expectations, is distinguished from its predecessors, which emphasize market fundamentals and unique equilibrium. However, a sudden outbreak of vulnerability that is triggered by market panic can also be explained by market fundamentals. This study shows that the Korean crisis was largely triggered by real appreciation, excessive lending, and a lack of adequate reserve protection, while expansionary fiscal and monetary policies as well as capital inflows were less central. Tests for a self-fulfilling crisis do not support the relationships among market fundamentals before the crisis. The real appreciation due to a weak yen and a strong won, excessive bank lending, and the mismanagement of foreign reserves led to the Korean crisis.
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