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A dynamic model of export competition, policy coordination and simultaneous currency collapse

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  • Chan Huh
  • Kenneth Kasa

Abstract

This paper offers a game-theoretic interpretation of the recent currency crisis in Asia. Specifically, we argue that the 'price wars during booms' logic of Rotemberg and Saloner (1986) can be used to explain the nearly simultaneous devaluation of several Asian currencies during the summer of 1997. The idea is as follows. Since each of these countries relies heavily on exports to the U.S. pressures for competitive devaluations naturally arise. ; We view the historical tendency of these countries to peg to the dollar as a way to avoid these pressures. However, it must be in the self-interest of each country to adhere to its peg, and we argue that an adverse common external the arrangement requires a collective devaluation that reduces the unilateral incentive to devalue, argue that China's 1994 devaluation can be interpreted as this adverse common shock. The novelty of our interpretation is that it views the recent currency crisis as part of a dynamic strategically cooperative equilibrium, as opposed to a single isolated event.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 97-08.

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Date of creation: 1997
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Publication status: Published in Review of International Economics (February, 2001, v. 9, no. 1)
Handle: RePEc:fip:fedfpb:97-08

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Keywords: Foreign exchange - Law and legislation ; Asia ; International trade;

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Cited by:
  1. Fernald, John & Edison, Hali & Loungani, Prakash, 1999. "Was China the first domino? Assessing links between China and other Asian economies," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 515-535, August.
  2. Glick, Reuven & Rose, Andrew K, 1998. "Contagion and Trade: Why are Currency Crises Regional," CEPR Discussion Papers 1947, C.E.P.R. Discussion Papers.
  3. Andrew K. Rose & Mark M. Spiegel, 2009. "Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and American Exposure," NBER Working Papers 15358, National Bureau of Economic Research, Inc.
  4. Reuven Glick & Ramon Moreno, 1999. "Money and credit, competitiveness, and currency crises in Asia and Latin America," Pacific Basin Working Paper Series 99-01, Federal Reserve Bank of San Francisco.
  5. Ramkishen Rajan, 2010. "The Currency and Financial Crisis in Southeast Asia: A Case of 'Sudden Death' or Death Foretold'?," Working Papers id:2583, eSocialSciences.
  6. Kenneth Kasa, 1998. "Borrowing constraints and asset market dynamics: evidence from the Pacific Basin," Economic Review, Federal Reserve Bank of San Francisco, pages 17-28.
  7. Menzie D. Chinn, 1998. "Before the Fall: Were East Asian Currencies Overvalued?," NBER Working Papers 6491, National Bureau of Economic Research, Inc.
  8. Ramkishen Rajan & Rahul Sen & Reza Y. Siregar, 2002. "Hong Kong, Singapore and the East Asian Crisis: How Important were Trade Spillovers?," Working Papers 142002, Hong Kong Institute for Monetary Research.
  9. Ramkishen S. Rajan & Chang Li Lin, 2010. "Regional Responses To The Southeast Asian Economic Crisis: A Case Of Self-Help Or No Help?," Working Papers id:2685, eSocialSciences.
  10. Jose Antonio R. Tan, III, 1998. "Contagion effects during the Asian financial crisis: stock price data," Pacific Basin Working Paper Series 98-06, Federal Reserve Bank of San Francisco.
  11. John Fernald & Hali Edison & Prakash Loungani, 1998. "Was China the first domino? assessing links between China and the rest of emerging Asia," International Finance Discussion Papers 604, Board of Governors of the Federal Reserve System (U.S.).
  12. Ramkishen S. Rejan, 1998. "The Currency And Financial Crisis In Southeast Asia - A Case Of `Sudden Deathã¢Â‚¬Â„¢ Or `Death Foretoldã¢Â‚¬Â„¢," Macroeconomics Working Papers 22381, East Asian Bureau of Economic Research.
  13. Reuven Glick, 1998. "Thoughts on the origins of the Asia crisis: impulses and propagation mechanisms," Pacific Basin Working Paper Series 98-07, Federal Reserve Bank of San Francisco.
  14. Roberta De Santis, 2004. "Has Trade Structure Any Importance in the Trasmission of Currency Shocks? An Empirical Application for Central and Eastern European Acceding Countries to Eu," ISAE Working Papers 43, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
  15. Leila Ali & Yan Kestens, 2006. "Contagion and Crises Clusters: Toward a Regional Warning System?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 142(4), pages 814-839, December.

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