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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.

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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Bibliographic 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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Citations

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Cited by:
  1. Pratap, Sangeeta & Quintin, Erwan, 2011. "Financial crises and labor market turbulence," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 601-615.
  2. M Farid, 2010. "Does Export Pricing Explain ‘Fear of Floating’ in Small Open Emerging Market Economies?," Discussion Papers 10/05, Department of Economics, University of York.
  3. Martin Uribe & Vivian Yue, 2004. "Country spreads and emerging countries: who drives whom?," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  4. Bertrand Gruss & Karel Mertens, 2009. "Regime Switching Interest Rates and Fluctuations in Emerging Markets," Economics Working Papers ECO2009/22, European University Institute.
  5. Felipe Meza & Erwan Quintin, 2005. "Financial Crises and Total Factor Productivity: The Mexican Case," 2005 Meeting Papers 478, Society for Economic Dynamics.
  6. Enrique G. Mendoza, 2008. "Sudden Stops, Financial Crises and Leverage: A Fisherian Deflation of Tobin's Q," NBER Working Papers 14444, National Bureau of Economic Research, Inc.
  7. Federico Ravenna & Giovanni Lombardo, 2009. "Trade and Optimal Monetary Policy," 2009 Meeting Papers 784, Society for Economic Dynamics.
  8. Mai Farid, . "Vertical Production and Macroeconomic Persistence: The Case of an Emerging Market Economy," Discussion Papers 09/11, Department of Economics, University of York.
  9. Giovanni Lombardo & Federico Ravenna, 2014. "Openness and Optimal Monetary Policy," Cahiers de recherche 1410, CIRPEE.
  10. Anton Korinek & Enrique G. Mendoza, 2013. "From Sudden Stops to Fisherian Deflation: Quantitative Theory and Policy Implications," NBER Working Papers 19362, National Bureau of Economic Research, Inc.
  11. Lombardo, Giovanni & Ravenna, Federico, 2014. "Openness and optimal monetary policy," Journal of International Economics, Elsevier, vol. 93(1), pages 153-172.
  12. Siok Kun, Sek, 2009. "The impacts of economic structures on the performance of simple policy rules in a small open economy," MPRA Paper 25065, University Library of Munich, Germany.
  13. David Cook & Hiromi Nosaka, 2005. "Dual labor markets and business cycles," Working Paper Series 2006-36, Federal Reserve Bank of San Francisco.
  14. Enrique G. Mendoza, 2005. "Sudden Stops in an Equilibrium Business Cycle Model with Credit Constraints: A Fisherian Deflation of Tobin's Q," 2005 Meeting Papers 307, Society for Economic Dynamics.
  15. Felipe Meza & Erwan Quintin, 2005. "Financial crises and total factor productivity," Center for Latin America Working Papers 0105, Federal Reserve Bank of Dallas.
  16. Yamamoto, Shugo, 2013. "Sudden stop and trade balance reversal after Asian crisis: Investment drought impact versus exchange rate depreciation," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 750-765.
  17. 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.

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