The collapse of the exchange rate regime for the Thai currency in July 1997, and the contagion' it unleashed in international ®nancial markets, appeared for a time to threaten economic welfare at a global level. If monetary relaxation in the major centres has succeeded in containing the threat, it has emphasized once more the interdependence between policy settings and market outcomes crucial to an understanding of the origins and implications of the Asian crisis. With the reform of the international ®nancial architecture' under active consideration, the three papers collected here address key aspects of this interdependency with an emphasis that diers somewhat from the tone of recent ocial discussion.
At some risk of oversimpli®cation, the received view appears to be that thoroughly undesirable outcomes may be reconciled with an unshaken belief in economic laissez faire through the assumption that policy induced distortions must be responsible. While none of the authors represented here would deny the importance of the policy framework they also direct attention to market behaviour, notably to the basis of expectations formation, in seeking the origins of ®nancial instability.
The need to give due weight to aspects of market behaviour is made clear in the ®rst paper presented below. Although stressing the role of ( policy induced) moral hazard in the excessive short-term external debts accumulated by Asian banks, the focus of Ronald McKinnon's paper is on the larger exchange rate context in which the exposure emerged. He clari®es in particular the role of the $US/Yen exchange rate relationship in the generation of this ®nancial vulnerability. Central to his argument is that interest dierentials between the USA and Japan have, over an extended period, re¯ected the market's belief that higher US in¯ation would lead to a secular depreciation of the $US against the Japanese currency. The market's failure fully to incorporate the demise of American in¯ation in the present decade has meant that the