Accounting for the East Asian Crisis: A Quantitative Model of Capital Outflows in Small Open Economies

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Accounting for the East Asian Crisis: A Quantitative Model of Capital Outflows in Small Open Economies

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Cook, David
Devereux, Michael B.

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Abstract

To what degree can the qualitative and quantitative aspects of the East Asian crisis be accounted for within a dynamic general equilibrium model? This paper investigates that question using a framework in which the crisis itself is modeled as an exogenous shock to the country risk premium. This exercise has empirical discipline because the scale of the shock can be measured by the movement in the reported risk premium. We calibrate a quantitative sticky-price dynamic general equilibrium model of a small open economy to match the features of three East Asian economies: Thailand, Korea, and Malaysia. We identify a shock to the country risk premium using published data from international bond markets, and identify short-run monetary policy using observed domestic interest rates. We find that the modeled response to the observed increase in external interest rates substantially matches macroeconomic data on prices and quantities at the aggregate and sectoral level. However, the model has more difficulty explaining the large exchange rate devaluations that occurred in those economies.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 3 (April)
Pages: 721-749
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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:3:p:721-749

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Mai Farid, . "Vertical Production and Macroeconomic Persistence: The Case of an Emerging Market Economy," Discussion Papers 09/11, Department of Economics, University of York. [Downloadable!]
David Cook & Hiromi Nosaka, 2005. "Dual labor markets and business cycles," Working Paper Series 2006-36, Federal Reserve Bank of San Francisco. [Downloadable!]
Other versions:
- David Cook & Hiromi Nosaka, 2006. "Dual labor markets and business cycles," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
Felipe Meza & Erwan Quintin, 2005. "Financial crises and total factor productivity," Center for Latin America Working Papers 0105, Federal Reserve Bank of Dallas. [Downloadable!]
Felipe Meza & Erwan Quintin, 2007. "Factor Utilization and the Real Impact of Financial Crises," The B.E. Journal of Macroeconomics, Berkeley Electronic Press, vol. 7(1). [Downloadable!]
Keisuke Otsu, 2007. "A Neoclassical Analysis of the Asian Crisis: Business Cycle Accounting of a Small Open Economy," IMES Discussion Paper Series 07-E-16, Institute for Monetary and Economic Studies, Bank of Japan. [Downloadable!]
David Cook & Michael B. Devereux, 2004. "Dollar bloc or dollar block: external currency pricing and the East Asian crisis," Pacific Basin Working Paper Series 2004-35, Federal Reserve Bank of San Francisco. [Downloadable!]
Martin Uribe & Vivian Yue, 2004. "Country spreads and emerging countries: who drives whom?," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
Other versions:
- Martin Uribe & Vivian Z. Yue, 2003. "Country Spreads and Emerging Countries: Who Drives Whom?," NBER Working Papers 10018, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Keisuke Otsu, 2008. "A Neoclassical Analysis of The Korean Crisis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 449-471, April. [Downloadable!] (restricted)
Bertrand Gruss & Karel Mertens, 2009. "Regime Switching Interest Rates and Fluctuations in Emerging Markets," Economics Working Papers ECO2009/22, European University Institute. [Downloadable!]

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