Multiple equilibria and currency crisis: evidence for Korea

Abstract

This paper estimates a non-linear model that allows for multiple equilibria using data on Korea during the currency crisis in 1997. Results suggest that Korea may have been vulnerable to self-fulfilling speculation as early as January 1997. An extended phase of multiple equilibria started in October 1997. The fundamentals for Korea remained in this crisis zone until March 1998. Korea briefly entered a multiple equilibria zone again in May and June 1998 before stabilizing in July 1998. Results are supportive of roles for weakness in fundamentals and for self-fulfilling beliefs in explaining currency crises.