| Why Did the System Collapse?
It has been argued elsewhere (Fane and McLeod, 1999; McLeod, forthcoming)
that the crisis that engulfed Indonesia from mid 1997 can be explained in terms of
widespread concerns about the ability of the government to properly manage an
adverse macroeconomic shock. Specifically, if it were widely believed that the
government might react to such a shock in a manner that would lead to a
significant increase in the money supply, then such a belief could turn out to be
self-fulfilling, because currency depreciation is the inevitable consequence of a
loss of monetary control.
In terms of this analytical framework, the initial shock provided by the
unexpected devaluation of the Thai baht in July 1997 caused investors to fear a
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