Contagion and the Asian Currency Crisis

Abstract

This study attempts to examine relationships among exchange rates in the Asian region using cointegration methods and to isolate country‐specific effects of contagion using an error correction model. Monthly data covering the period from July 1992 to December 1997 are used. Dynamic simulations of exchange rates with and without short‐run effects of exchange rate shocks are performed. The results indicate that stable long‐run relationships exist among exchange rates in the region. Simulation results for some countries indicate that these countries’ exchange rates would have depreciated in the long run even in the absence of the short‐run effects of potential contagion from other countries, while for other countries the opposite is true.