Causes of Crisis:

The causes of  the  crisis are often disputed. Overemphasis  on excessive financial and capital market liberalisation as opposed to generating real sector activities have been  considered as the root cause of  the crisis. This  led  to speculative capital of short term nature to flow into these countries and when its outflow  began it left the countries in a state of  financial crisis. Due  to capital market integration while on one hand such rapid outflows were facilitated, on the other hand, it also created the  'contagion effect' - crisis spreading from one country to another.

Some economists have maintained that the main cause of the  crises was excessive  real estate speculation and the mismatch between foreign currency- denominated borrowings and local currency  denominated returns. While some consider 'moral hazard' in the banking and financial system, others give more emphasis  to excessive speculation by short-term investors.  

Arguments of others have downplayed  the role of  the real economy in the crisis compared to the financial markets due to the speed of the crisis. The rapidity with which  the crisis happened has prompted Sachs and others to compare  it to a classic bank run prompted by a sudden  risk shock. Sachs  points to  strict monetary and  contractory fiscal policies  implemented by  the governments at the advice of  the IMF in the wake of the crisis, while Frederic Mishkin points to the role of asymmetric information in the financial markets that led to a "herd mentality" among  investors  that magnified a  relatively small risk in the real economy. The crisis has thus attracted  interest  from  behavioural economists interested in market psychology.

However, some believed that the Asian crisis was created not  by market psychology but by macroeconomic policies of  the  crisis-hit countries that distorted information, which in turn  created  the  volatility  that attracted speculators. According  to this  argument, what some have called "herd mentality" was merely  the result of speculators behaving rationally, noting the fraudulent currency policies of the countries (fixed exchange rates defended by the-governments),  which speculators assumed could not be sustained.