Contagion Effects, Informational Effects, and Economic Fundamentals: An Analysis of Exchange Rate Dynamics during the Asian Currency Crisis
AbstractThis paper develops an empirical framework to determine if the Asian currency crisis was contagious, and if so, whether the contagion was warranted or unwarranted. By applying a monetary-portfolio model to monthly data for 1991 - 1998, our results show that short-run variations in exchange rates were largely unexplained by macroeconomic fundamentals. The regime shift in our model suggests that informational effects had a major impact. For example, the collapse of the Thai baht released information for economic agents to reassess the stability of other currencies. Moreover, there were excessive correlations between exchange rates, even after controlling for the influence of fundamentals. All these indicate that the Asian currency crisis was contagious. However, further analysis of the residuals and classification of economies based on cluster analysis together indicate that the Thai baht crisis spread to economies with similar economic conditions. This finding supports the hypothesis of warranted contagion, i.e. the spread of a crisis is not entirely random and dependent on fundamentals.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 022000.
Length: 25 pages
Date of creation: Jun 2000
Date of revision:
Contact details of provider:
Postal: 55th Floor , Two International Finance Centre , 8 Finance Street , Central, Hong Kong
Phone: (852)2878 1978
Fax: (852)2878 7006
Web page: http://www.hkimr.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Aaron Tornell, 1999.
"Common Fundamentals in the Tequila and Asian Crises,"
Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research
1868, Harvard - Institute of Economic Research.
- Aaron Tornell, 1999. "Common Fundamentals in the Tequila and Asian Crises," NBER Working Papers 7139, National Bureau of Economic Research, Inc.
- Qinglai Meng & Andres Velasco, 1999. "Can Capital Mobility be Destabilizing?," NBER Working Papers 7263, National Bureau of Economic Research, Inc.
- King, Mervyn A & Wadhwani, Sushil, 1990.
"Transmission of Volatility between Stock Markets,"
Review of Financial Studies, Society for Financial Studies,
Society for Financial Studies, vol. 3(1), pages 5-33.
- Michael D. Bordo & Anna J. Schwartz, 1996. "Why Clashes Between Internal and External Stability Goals End in Currency Crises, 1797-1994," NBER Working Papers 5710, National Bureau of Economic Research, Inc.
- Flood, Robert P & Rose, Andrew K, 1998.
"Understanding Exchange Rate Volatility Without the Contrivance of Macroeconomics,"
CEPR Discussion Papers, C.E.P.R. Discussion Papers
1944, C.E.P.R. Discussion Papers.
- Flood, Robert P & Rose, Andrew K, 1999. "Understanding Exchange Rate Volatility without the Contrivance of Macroeconomics," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(459), pages F660-72, November.
- Somanath, V. S., 1986. "Efficient exchange rate forecasts: Lagged models better than the random walk," Journal of International Money and Finance, Elsevier, Elsevier, vol. 5(2), pages 195-220, June.
- Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 78(2), pages 200-224.
- Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 3-24, February.
- Graciela Laura Kaminsky, 1997.
"Leading Indicators of Currency Crises,"
IMF Working Papers
97/79, International Monetary Fund.
- Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
- Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
- Allan Drazen, 1999.
"Political Contagion in Currency Crises,"
NBER Working Papers
7211, National Bureau of Economic Research, Inc.
- Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996.
"Contagious Currency Crises,"
CEPR Discussion Papers, C.E.P.R. Discussion Papers
1453, C.E.P.R. Discussion Papers.
- Anna J. Schwartz, 1998. "International Financial Crises: Myths and Realities," Cato Journal, Cato Journal, Cato Institute, Cato Journal, Cato Institute, vol. 17(3), pages 251-256, Winter.
- Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
- George Tavlas, 1996. "Currency crises: Introduction," Open Economies Review, Springer, Springer, vol. 7(1), pages 431-436, March.
- Hooper, Peter & Morton, John, 1982. "Fluctuations in the dollar: A model of nominal and real exchange rate determination," Journal of International Money and Finance, Elsevier, Elsevier, vol. 1(1), pages 39-56, January.
- Kristin Forbes & Roberto Rigobon, 1999.
"No Contagion, Only Interdependence: Measuring Stock Market Co-movements,"
NBER Working Papers
7267, National Bureau of Economic Research, Inc.
- Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, American Finance Association, vol. 57(5), pages 2223-2261, October.
- Artis, Michael J & Zhang, Wenda, 1997. "On Identifying the Core of EMU: An Exploration of Some Empirical Criteria," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1689, C.E.P.R. Discussion Papers.
- Kruger, Mark & Osakwe, Patrick N. & Page, Jennifer, 1998. "Fundamentals, Contagion and Currency Crises: An Empirical Analysis," Working Papers, Bank of Canada 98-10, Bank of Canada.
- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
- Walter B. Wriston, 1998. "Dumb Networks and Smart Capital," Cato Journal, Cato Journal, Cato Institute, Cato Journal, Cato Institute, vol. 17(3), Winter.
- Robert Dekle & Cheng Hsiao & Siyan Wang, 1999. "Interest rate stabilization of exchange rates and contagion in the Asian crisis countries," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Sep.
- Paul R. Milgrom, 1978. "Rational Expectations," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 406, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
- A. W. Coats, 1996. "Introduction," History of Political Economy, Duke University Press, vol. 28(5), pages 3-11, Supplemen.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (HKIMR).
If references are entirely missing, you can add them using this form.