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How Much Did Excess Debt Contribute to the 1997 Currency Crisis in Korea?

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  • Duo Qin

    (Queen Mary and Westfield College, University of London)

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Abstract

It is widely believed that seriously excess debt problems form a major cause of the 1997 Asian financial crisis. This paper investigates empirically the role of the debt problems with respect to both the won/$US rate fluctuations and the won collapse in November 1997. The problems are represented by two institutional variables in nonlinear equilibrium-correction models. The variables are found to exert positive feedback effects on the won rate returns in three forms: disequilibrium in levels, short-run shocks and explosive bubbles. However, the estimated effects are not so singly conspicuous as to serve as the predictor of a likely crash in the won rate in late 1997. Excess debt is hence found to only constitute one of the many factors which brought about the 1997 won collapse.

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Paper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 407.

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Date of creation: Jul 1999
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Handle: RePEc:qmw:qmwecw:wp407

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Keywords: Disequilibrium; Currency crisis; Excess debt; Institutional variable; Self-fulfilling effect; Intrinsic bubble; Soft-budget constraint;

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