Empirical analyses of currency crises in five Asian economies

• Main Author: Lim, Guan Choo
• Published: University of Birmingham 2005
• Subjects: 332.4
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.633222

This thesis is an empirical assessment of the factors that have been advanced as determinant of a currency crisis. Our focus is largely on Thailand, Malaysia, South Korea and Indonesia. A crisis is said to occur when market pressure (MP) rises to a crisis level, arising from the nominal exchange rate depreciation and loss in international reserves. The expected values of the macroeconomic fundamentals that determine MP are determined by the market's experience of its past realized value and its change at the end of the current period. The third generation currency crisis model explains MP for South Korea, Thailand and Indonesia. We extend the third generation model to include financial development and non-performing loans. Financial development has partly been blamed for the recent crisis in 1997. Financial development can induce positive effects by stimulating economic development and efficiency, and therefore increase resilience to shocks. However, financial deregulation measures are likely to be destabilizing and adverse without the support of a sound prudential regulatory framework. The findings for the influence of financial development are mixed. We also compare the determinants of a crisis in an Asian crisis economy with a comparator country, Taiwan, which has been a largely crisis free economy. The comparator study is based on the balance sheet approach of the third generation currency crisis model, which generalizes the third generation model by including financial development and NPLs. Indonesia is the only one chosen for the "comparator" study due to the availability of the data on NPLs (the same data were unavailable for the other countries); it was the most severely affected economy during the 1997-98 crisis. The diverse outcomes of Indonesia and Taiwan to the speculative attacks in 1997-98 are attributable to their levels of development. The heterogeneity in all these countries removes any advantage from pooled estimations.