Asian Currency Crisis Research Articles

Contagion, Monsoons and Domestic Turmoil in Indonesia: A Case Study in the Asian Currency Crisis

This paper investigates whether Indonesia's recent currency crisis was due to domestic fundamentals, common external shocks (monsoons), or contagion from neighboring countries. Markov-switching models attribute speculative pressures on Indonesia's currency to domestic political and financial factors and contagion from speculative pressures in Thailand and Korea. In particular, the results from a time-varying transition probability Markov-switching model (which overcomes some drawbacks from previous methods) show that inclusion of exchange rate pressures from Thailand and Korea in the transition probabilities improves the conditional probabilities of crisis in Indonesia. There is also evidence of contagion in the stock market.

COINTEGRATING SMOOTH TRANSITION REGRESSIONS

This paper studies the smooth transition regression model where regressors are I(1) and errors are I(0). The regressors and errors are assumed to be dependent both serially and contemporaneously. Using the triangular array asymptotics, the nonlinear least squares estimator is shown to be consistent, and its asymptotic distribution is derived. It is found that the asymptotic distribution involves a bias under the regressor-error dependence, which implies that the nonlinear least squares estimator is inefficient and unsuitable for use in hypothesis testing. Thus, this paper proposes a Gauss–Newton type estimator that uses the nonlinear least squares estimator as an initial estimator and is based on regressions augmented by leads and lags. Using leads and lags enables the Gauss–Newton estimator to eliminate the bias and have a mixture normal distribution in the limit, which makes it more efficient than the nonlinear least squares estimator and suitable for use in hypothesis testing. Simulation results indicate that the results obtained from the triangular array asymptotics provide reasonable approximations for the finite-sample properties of the estimators and t-tests when sample sizes are moderately large. The cointegrating smooth transition regression model is applied to the Korean and Indonesian data from the Asian currency crisis of 1997. The estimation results partially support the interest Laffer curve hypothesis. But overall the effects of interest rate on spot exchange rate are shown to be quite negligible in both nations.This paper was partly written while the first author was visiting the Institute of Statistics and Econometrics at Humboldt University, Berlin. This author acknowledges financial support from the Alexander von Humboldt Foundation under a Humboldt Research Award and from the Yrjo Jahnsson Foundation. The second author wrote this paper while visiting the Cowles Foundation for Research in Economics, Yale University. This author thanks the faculty and staff of the Cowles Foundation, especially Don Andrews, John Geanakoplos, David Pearce, Peter Phillips, and Nora Wiedenbach, for their support and hospitality. The second author was financially supported for the research in this paper by Kookmin University. The authors thank Don Andrews, Helmut Lutkepohl, Peter Phillips, Bruce Hansen, and two referees for their valuable comments on this paper. Part of the data studied in this paper was provided by Chi-Young Song, whom we thank.

Stock prices as a leading indicator of the East Asian financial crisis

Using a basic monetary model, we assess the effectiveness of stock prices as a leading indicator of the East Asian currency crisis in 1997 and 1998. Stock prices are incorporated into a monetary model, through the wealth effect postulated by Friedman [J. Pol. Econ. 96 (1988) 221]. In addition to the domestic stock price, we also incorporate the stock prices of Hong Kong, China and Japan. Using monthly data, the results indicate that the domestic stock price, the Hong Kong stock price and particularly US prices are significant leading indicators of the crisis. Causality tests suggest evidence of bi-causality between the stock markets and foreign exchange markets.

Real Estate Speculation as a Source of Banking and Currency Instability: Some Different Lessons from the Asian Crisis

AbstractA central feature of the Asian currency crisis of 1997/1998 was the vast prior capital inflow into the region, and the later rapid reversal of that movement. In seeking to explain why this outflow of capital took place and was so devastating for the countries concerned, various writers have laid blame upon a combination of connected lending, poor bank supervision, moral hazard and “crony capitalism”.Our emphasis is different. Much of the capital inflow financed a vast over-expansion of commercial real estate development. Plunging real estate values accompanied by severe difficulties in the banking and financial sector were common occurrences across the region. The argument we advance is that property plays a special role in banks’ portfolios and that large international portfolio capital flows mediated by banks will usually lead to rapidly appreciating asset prices which will result in banking/currency crises.

Challenges for currency cooperation in East Asia

The defects of the current international financial system are creating tremendous distortions in the economies of East Asia. For the time being, most of the developing countries in East Asia have no choice but to adopt some sort of a flexible, wider band system (crawling band) while resorting to capital control when necessary, in order to avoid the recurrence of the Asian currency crisis. Japan's approach to building a stable international financial system in East Asia has gone through several stages since the late 1970s. Though the latest approach of setting up the Asian Bond Fund (ABF) is a step in the right direction, the ABF has severe limitations in reducing the risks for the developing countries in Asia. The ABF needs to be replaced by the Asian Bond Corporation (ABC) in order to develop an international capital market in Asia and use the abundant saving in Asia for financing the growth of Asia. In the process of expanding the activities of the ABC, Asia can adopt the notional common currency based on a basket of major currencies. That notional currency will pave the way toward introducing the Asian common currency, which can be the ultimate goal for the economic cooperation and integration in East Asia. In the meantime, while enhancing currency cooperation, East Asia needs a lender of the last resort in order to keep its economy from collapsing from another currency attack. Japan has been trying to play that role and is poised to take that responsibility as the largest and the most developed economy in the region. International capital markets and a truly international currency must be supported by numerous institutions and intellectual frameworks. Asia is yet to build those institutions. To help build those institutions, we in East Asia need to establish a new international research institution which would coordinate the strenuous intellectual efforts needed for building institutions that bolster the international capital market in Asia. The envisaged new institute can be dubbed the "Asian Monetary Institute," or "AMI."

Crisis and Creative Destruction: Cases of Korean and Japanese Stock Markets

In this essay, we investigate the contrasting performance of Korean and Japanese stock markets before and after the East Asian currency crisis. The Korean stock markets showed a sharper decline and a faster recovery than the Japanese stock markets. First, we theoretically explain these contrasting movements of stock markets by explicitly modeling and adding some new elements to the idea of IT revolution in Greenwood and Jovanovic (Amer. Econom. Rev. 89, 1999, 116–122). Then we empirically prove that the theoretical model in this paper has some quantitative support by considering the level of monthly stock market capitalization and the return on daily stock index in Korea and Japan.

Horizontal and Vertical Intra-Industry Trade: The Case of Asean Trade in Manufactures

For over two decades prior to the Asian Currency crisis of 1997, the economies of the ASEAN-5 underwent an impressive economic expansion while increasing their openness to trade. This paper examines the role of intra-industry trade (IIT) in intra-ASEAN trade. Focusing on trade in manufactures, it breaks down IIT by vertically (VIIT) and horizontally (HIIT) differentiated goods, and identifies country-specific factors which drive them. By 1996, while 60% of the total intra-ASEAN trade constituted IIT, the share of IIT in trade in manufactures was even higher, dominated by VIIT which reflected differences in capital-labor intensity. Market size and foreign direct investment also influenced both VIIT and HIIT. [F14]

Modelling International Travel Demand from Singapore to Australia

ABSTRACT Prior to the recent Asian currency and economic crises, tourism from Asia had rapidly become Australia's major tourism export industry. Tourists from Singapore, which is Australia's fifth major market, represented 6% of international tourist arrivals to Australia in 1996. The average annual growth rate of tourist arrivals from Singapore of around 20% over 1990–96 far exceeded the 10.5% average annual percentage growth rate of all tourist arrivals to Australia over the same period (Australian Bureau of Statistics 1997). Despite the Asian currency and economic crises in 1997–98, tourist arrivals to Australia from Singapore have continued to grow slowly. It is imperative to consider the economic factors influencing international tourism demand for Australia by Singapore, and to undertake a sensitivity analysis of tourist arrivals to changes in the factors. The purpose of the paper is to estimate the income, price and transportation cost elasticities of inbound tourism from Singapore to Australia using seasonally unadjusted quarterly data. Initially, estimation is undertaken using ordinary least squares. Given New Zealand's proximity to Australia, it is also useful to determine using a single-equation model if Australia and New Zealand are substitute or complementary destinations for Singaporean tourists by examining the effects of the relative price changes in New Zealand and Australia on international travel demand for Australia. In addition, seasonal influences are examined using the single-equation model. The OLS estimates of the appropriate single-equation model are also compared with the estimates obtained using the cointegration method in Lim and McAleer (2001).

The State Matters: Management Models of Singaporean Chinese and Korean Business Groups

Both the proponents and critics of Asian economic organization have been preoccupied with the ideal-typical management models of family businesses, and have rarely identified their changing management structures. We, instead, identify the change and continuity in these management structures through an analysis of family-controlled business groups in Singapore and South Korea before and after the Asian currency crisis. In our view, these business groups professionalized their management, but retained family control and corporate rule before the crisis. The crisis, however, increased the pressure on such groups to relinquish family control and corporate rule. Singaporean Chinese business groups tended to loosen their tight grip on corporate rule by absorbing more professional managers into their upper echelons. The surviving Korean chaebol, however, intensified family control. Only a few chaebol, which were on the brink of bankruptcy, relinquished corporate rule to professional managers. We argue that other than the market, cultural, and institutional factors as suggested in the existing literature, state capacities and strategies do matter in shaping the changing management structures of business groups. Drawing on our analysis, researchers will be able to conduct comparative studies of family businesses across East Asian societies, of organizational imitation, and of the role of the state in influencing management models.

TRADE PATTERNS AND EXCHANGE RATE REGIMES: TESTING THE ASIAN CURRENCY BASKET USING AN INTERNATIONAL INPUT‐OUTPUT SYSTEM

This paper aims at analyzing exchange rates and trade patterns of Indonesia, Malaysia, the Philippines, Thailand, China, Korea, Singapore, and Taiwan in relation to Japan and the United States, with reference to the Asian currency crises in 1997. In order to analyze these issues, we constructed an international input‐output model linked with macroeconometric models of the ten countries/regions. Analyses on the Asian exchange rates with a currency basket peg framework show that the Asian exchange rate policy was the de‐facto dollar peg policy. As for trade patterns in relation to the yen‐dollar rate; when a country/region's industrial structure is similar to that of Japan's and the yen is weak, the appropriate change of the yen's weight proves to hold its competitiveness. By contrast, the weak yen shows a decrease of its imports, regarding complementary structure. In either case, however, effects are limited.

Portfolio investment of the OIC countries and their implications on trade

Summarizes the net capital flows from industrial to developing/transitional countries 1970‐1996 and recent changes in their equity and bond markets; and identifies the factors affecting these portfolio flows and risk/return behaviour in OIC stock markets. Uses monthly stock return data from ten OIC countries to demonstrate that despite their volatility they might offer opportunities for portfolio diversification; and uses cointegration methods to investigate the dynamic relationships between them. Discusses the causes of the Asian currency crisis and its impact on these stock marekts; and considers what trade and development policies OIC countries should adopt to improve their economies.

Japanese policy in the Asian economic crises and the developmental state concept

This article examines Japan’s commitments to the developmental state concept after the Asian economic and currency crises. Some aspects of the concept have been regarded as the causes of the crises, and Japan was seen as failing to defend effectively its own developmental model. However, the Japanese government has strengthened policies and institutions for industrial cooperation toward East Asia after the crises, stressing the elements of the developmental state such as close business–government collaboration and effective uses of public corporations as measures to rehabilitate the growth model in East Asia. In its efforts to assist industrial restructuring in Thailand, the Japanese government made its Thai counterpart acknowledge the necessity of state intervention in fostering small and medium-sized enterprises, and sought to transfer experiences and know-how of institution building such as the advisory council system, the policy finance system and industrial development coordinated by trade associations. Thus, the Japanese government maintained and partially intensified the developmental state approach in its cooperation with industrial restructuring programmes in major East Asian countries after the Asian crises.

A Decade of Australian Economic Growth: Outcomes for the Labour Market

The aim of this paper is to consider some of the issues raised by three recently published books: Unemployment: The Tip of the Iceberg edited by Mitchell and Carlson; The Price of Prosperity, edited by Saunders and Taylor; Work Rich, Work Poor edited by Borland, Gregory and Sheehan (referred to here as MC, ST and BGS) analysing recent trends in the Australian Labour Market.For the decade since 1992, Australia has experienced a sustained rate of strong economic growth unprecedented in Australian economic history. This period of continuous strong growth in GDP has been accompanied by low inflation. (We might say that the low inflation has permitted the strong sustained growth because it has meant that the Reserve Bank of Australia has not seen the need over the period to impose the sort of draconian restrictive monetary policy of 1990-1.) The strong growth performance has been in the face of the Asian currency crisis from 1997, a recessed Japanese economy over the decade, slow growth in most of Europe, and some hesitations in the performance of the primary engine of world economic growth, the US economy.

The Distributional Impacts of Indonesia's Financial Crisis on Household Welfare: A "Rapid Response" Methodology

Analyzing the distributional impacts of economic crises is an ever more pressing need. If policymakers are to intervene to help those most adversely affected, they need to identify those who have been hurt most and estimate the magnitude of the harm they have suffered. They must also respond in a timely manner. This article develops a simple methodology for measuring these effects and applies it to analyze the impact of the Indonesian economic crisis on household welfare. Using only pre‐crisis household information, it estimates the compensating variation for Indonesian households following the 1997 Asian currency crisis and then explores the results with flexible nonparametric methods. It finds that virtually every household was severely affected, although the urban poor fared the worst. The ability of poor rural households to produce food mitigated the worst consequences of the high inflation. The distributional consequences are the same whether or not households are permitted to substitute toward relatively cheaper goods. The geographic location of the household matters even within urban or rural areas and household income categories. Households with young children may have suffered disproportionately large adverse effects.

Foreign direct investment by Japanese firms and corporate governance: in relation to the monetary policies of China, Korea and Japan

Reflecting upon the lessons from the Asian currency crises, more attention is being paid to the importance of consolidation for the domestic financial and capital markets, as well as international cooperation to avoid disturbing factors from abroad, such as massive inflows of speculative capital. The aim of financial reforms being executed in the East Asian countries, such as Japan, Korea, and China, is to improve the managerial efficiency of the business corporations and financial institutions. Recently, foreign direct investment by Japanese firms in the rest of the East Asia has been recovering. However, the existence of a financial system to realize optimal corporate governance is indispensable for the enhancement of direct investment. Namely, it is necessary to improve corporate profitability, and to distribute the increment of such profits between the host and the investor countries, in order to boost the welfare of the respective citizens, notwithstanding the type of foreign direct investment.

Food and nutrition security and poverty alleviation in the Philippines

Poverty, food and nutrition insecurity remain as critical problems in the Philippines. The average Filipino in 1997 needed an annual income of at least P7710 to meet food requirements or P11 319 to meet both food and non‐food requirements. Approximately 4 511 000 families (31.8%) are poor and most of these are in the rural areas. Economic growth in the country has been characterized as a ‘boom and bust’ cycle with growth derailed by a combination of natural calamities, adverse domestic political factors, energy shortages, and external shocks such as the Asian currency crisis. In 1988 the gross national product (GNP) reached a peak of 7.2% and then declined to less than 1% in 1991. The economy started to recover in 1992, and the GNP peaked at 7.2% in 1996. The Asian financial crisis, compounded by the drought in 1998, led to a fall in the output of the agricultural sector by 6.6%. A stronger world economy, however, in 1999 helped the Philippine economy to recover. The Food Balance Sheet 1997 indicates that there has been a steady increase in the aggregate net food supply in 1992−1997 with the cereals group contributing approximately 25% of the total food supply. Translating this into calorie supply, this has provided approximately 2400 kcal/person per day or approximately 25% more than 2000 kcal/day. The fact that mean per capita intake is low indicates a gap between supply, distribution and consumption. The 1998 Food and Nutrition Research Institute survey showed that nutritional deficiencies still persist. Among 0−5‐year‐old children, underweight was approximately 32.0%; stunting 34.0% and wasting 6.0%. Underweight among 6−10‐year‐olds was 30.2% while stunting was 40.8%. Vitamin A deficiency, iron deficiency anaemia and iodine deficiency disorder continue as public health concerns. Food security and poverty alleviation are among the top priority programmes. The Medium‐Term Philippine Development Plan (1999−2004) enunciates the country's vision of creating a modern and humane society through improved quality of life characterized by food‐secure and poverty‐free Filipinos, in an ecologically healthy state. The different government programmes are the following: the Agriculture and Fisheries Modernization Act of 1997 provides the blueprint for developing and modernizing the agriculture and fisheries sectors; the National Anti‐Poverty Alleviation Commission was created as the coordinating and advisory body for the implementation of poverty eradication programmes of the different sectors; the vision of the Medium‐Term Philippine Plan of Action for Nutrition is of a nutritionally improved country whose people are well nourished, healthy, intelligent, and socially and economically productive with a strong sense of human dignity.

On the Desirability of a Regional Basket Currency Arrangement

This paper constructs a theoretical model of international trade in order to examine an optimal exchange rate regime for (Asian) emerging market economies that export goods to the United States, Japan, and neighboring countries. The optimality of the exchange rate regime is defined as minimizing the fluctuation of trade balances, in the environment where the yen–dollar exchange rate fluctuates exogenously. Since the de facto dollar peg regime is blamed as one of the factors that caused the Asian currency crisis, the question of the optimal exchange rate regime is quite relevant in Asia. The novelty of this paper is to show how an emerging market economy's choice of the exchange rate regime (or weights in the basket) is dependent on the neighboring country's. The dollar weights in the currency baskets of the two countries are determined as a Nash equilibrium. We show that they may be stuck at the dollar peg system in both stable and unstable equilibrium cases. Even in a stable equilibrium case, there are multiple equilibria and a coordination failure may occur. J. Japan. Int. Econ., September 2002, 16(3), pp. 317–334. Department of Commerce and Management, Hitotsubashi University, Kunitachi, Tokyo 186-8601, Japan; and Institute of Economic Research, Hitotsubashi University, Kunitachi, Tokyo 186-8601, Japan; Research Center for Advanced Science and Technology, University of Tokyo, Meguro, Tokyo 153-8904, Japan. © 2002 Elsevier Science (USA). Journal of Economic Literature Classification Numbers: F31, F33, O11.

How Integrated Were Foreign Exchange Markets in the Asia-Pacific Region in the Past?: Evidence from the Parallel Market

The East Asian currency crisis of 1997-98 has led to considerable interest on the interlinkages between foreign exchange markets in the Asian region. Implicit in the literature is the assumption that the currency crisis can be linked to close integration of the goods and capital markets of the Asian economies both with each other and with the advanced market economies in recent years. In this paper, we find evidence of strong interlinkages between the parallel exchange rates of five East Asian countries: Hong Kong, Indonesia, Malaysia, The Philippines and Thailand in the 1970s and early 1980s, a period when it was generally believed that there may not have been as strong an interlinkage between these economies in terms of international trade or finance as we observe in the 1990s. Thus, interlinkages between exchange rate markets in the Asian region are not a recent phenomenon and may not necessarily be linked to the capital and commodity market liberalisation undertaken by the Asian economies in recent years.

Trade similarities and contagion among the Asian crisis economies

This paper estimates trade similarities among the recent currency crisis economies in Asia. Direct measures of trade similarities, by the elasticities of substitution of national exports, are computed. Our finding supports the hypothesis that the Asian currency crisis (or the mechanism of competitive devaluations) spreads among economies with similar and close trade ties.

The Asian Currency Crises: Vulnerability, Contagion, or Unsustainability

The Asian currency crises have been introduced by many economists as evidence that almost any country could be vulnerable to speculative attacks and to contagion effects, even with apparently good economic fundamentals. These financial crises have also been interpreted by other economists as rational market reactions to the unsustainability of domestic macroeconomic policies or structural weaknesses. The objective of this paper is to evaluate the relative importance of macroeconomic unsustainability, financial vulnerability, and crisis contagion in a model that explains and predicts the Asian currency crises. Out‐of‐sample forecasts based on two‐stage panel and logit regressions provide evidence of a pure contagion effect, which significantly worsened the crises. They also show that Indonesia was the only one of the six Asian nations examined (India, Indonesia, Malaysia, Philippines, South Korea, Thailand) that was in an unsustainable economic situation, and that the other five nations were only vulnerable to a currency crisis.