LAUSR

Using quarterly data spanning 1990–2012, this study estimates the optimal debt/net worth ratio for ASEAN 4 economies and whether business indebtedness of the private sector in Indonesia, Malaysia, the Philippines, and Thailand was excessive during the period. Using the single-equation model from Stein’s stochastic optimal control-dynamic programming, I find that increased capital inflows and lower borrowing costs following financial liberalization spurred excessive borrowing before Asia’s 1997–1998 financial crisis. Results confirm Stein’s theory that rising excess indebtedness signals an impending financial crisis.