The first essay of this dissertation examines the 1997 Asian financial crisis. It is shown that existing literature on currency crises fail to provide any early warning indicators that would have predicted the across-the-board distress seen in the Asian economies. An alternative approach to tracking financial fragility is proposed---by examining the role of capital inflow in the credit channel. Episodes of credit boom, fueled by capital inflow, can signal excessive liquidity formation, moral hazard and increased risk taking in an economy. One way to test for this is to find episodes when the relationship between capital inflow and credit growth changes after financial liberalization. Excessive liquidity creation is tested by regressing credit growth on capital inflow and change in money for a sample of 18 emerging economies. It is seen that the countries that fell in financial distress had the common characteristic of capital flows having a significant impact on private credit creation. The second essay investigates the evidence of contagion in the Asian crisis. We focus on the exchange rate, interest rate, equity, and sovereign debt markets of Thailand, Malaysia, Indonesia, Korea, and the Philippines. We begin by testing for significant increases in cross-border correlation among the financial markets. Evidence of increase in correlations in the currency and the sovereign spreads markets is found, but not in the equity markets. Next, we construct a set of dummy variables to take into account movements in fundamentals. Regression analysis shows that own-country news and other fundamentals had substantial impact on the markets. However, residual analysis shows that after controlling for fundamentals, there remains substantial cross-border correlation in the financial markets. In the final essay, I examine the factors leading to the 1997 Thai financial crisis. Thailand's financial liberalization measures from the mid-80s to present are analyzed, and a series of tests are run to identify the impact of real exchange rate, credit growth, and capital inflows. I argue that exchange rate misalignment, heavy reliance on short term capital inflow, and excessive liquidity creation were the main factors that fundamentally weakened the Thai economy, leading to the collapse.
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