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The Asian Crisis: a Perspective after Ten Years

The Asian Crisis: a Perspective after Ten Years. W. Max Corden Department of Economics University of Melbourne. Introduction. Focus on four nations: Thailand , Indonesia, Malaysia, Korea The fundamental causes and trigger Financial crisis and exchange rate regime Policy responses

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The Asian Crisis: a Perspective after Ten Years

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  1. The Asian Crisis: a Perspective after Ten Years W. Max Corden Department of Economics University of Melbourne

  2. Introduction • Focus on four nations: Thailand, Indonesia, Malaysia, Korea • The fundamental causes and trigger • Financial crisis and exchange rate regime • Policy responses • Special features of the four nations

  3. The Boom • Financed by both local savings and by foreign capital inflow • Three forms of foreign capital inflow: 1. FDI 2. portfolio capital into local stock markets 3. short-term borrowing

  4. The Bust and The Trigger • Fundamental cause: investment booms that ended in a period of ‘irrational exuberance’ • Trigger in Thailand: domestic and external factors collapse in exports growth rate increase in current account deficit  exchange rate crisis (depreciation of Thai) • Trigger of the other three countries: Thai Baht depreciation

  5. Exchange Rate Regime and Crisis • East Asian Crisis Exchange Rate Crisis • Fixed Exchange-rate System: not perceive hedging governments try to keep the value of their currencies constant against another (usually US dollars) • Floating Exchange Regime: perceive hedging a currency's value is allowed to fluctuate according to the foreign exchange market.

  6. Currency Mismatch- Unhedged Foreign Borrowing • Apply to Indonesia, Thailand and Korea • Balance Sheet Effects —unhedged foreign borrowing denominated in foreign currency: international short-term borrowingin dollars domestic lending in local currency domestic currency depreciation

  7. Recession • Decline in Investment • Financial crisis due to excessive domestic lending and decline in assets value • Reduction of private consumption • Currency mismatch on Balance Sheet

  8. The Policy Responses • Moderate the Depreciation • Rescue the Banks • Keynesian Demand Expansion Various increases in public expenditure Public sector infrastructure investment Deliberate reductions in interest rates

  9. Special Features of Four Countries • Thailand: Fixed-but-adjustable Exchange rate Regime(FBAR) • Indonesia: economic problem interacted with political problem • Korea: achieve more assistance from IMF and US faster recovery • Malaysia: have no currency mismatch problem government control on short-term capital outflow

  10. Conclusion • Boom • Bust and Trigger • Recession • The Policy Responses • Special Features of Four countries

  11. Thank You!

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