Does a thin foreign exchange market lead to destabilizing capital-market speculation in the Asian Crisis countries?
AbstractThe authors investigate how the thinness of foreign-exchange markets causes destabilization speculation, especially when exchange-rate flexibility is increased, as it has been in the countries involved in the Asian crisis. They analyze the impact of this market thinness on the dynamic capital mobility and capital market risk of four countries involved in the Asian crisis: Indonesia, the Republic of Korea, Malaysia, and Thailand. Using the vector-autoregression model, impulse response functions, and variance decomposition, they show that in response to one-standard-deviation shock to interest and exchange rates, the dynamic capital mobility of all four countries decreases in the short run. These shocks also cause the capital market risk of these countries to rise. Since the onset of the Asian crisis, the countries involved responded by raising their interest rates and devaluing their currencies. These measures were intended to stem capital flight from the borrowing countries and to encourage capital inflows. But in an environment of protracted financial sector reform and thin foreign exchange markets, these standard policies did not stabilize capital inflows into these countries. The authors'research supports the view that because standard policies were unable to change institutional investors'(self-fulfilling) expectations and herding behavior, the countries'policies have, in the short run, not been successful. This failure is in large part attributable to the very thin foreign exchange markets in these Asian countries.
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 The World Bank in its series Policy Research Working Paper Series with number 2056.
Date of creation: 28 Feb 1999
Date of revision:
Fiscal&Monetary Policy; Banks&Banking Reform; Payment Systems&Infrastructure; Economic Theory&Research; Capital Markets and Capital Flows; Banks&Banking Reform; Economic Theory&Research; Macroeconomic Management; International Terrorism&Counterterrorism; Insurance&Risk Mitigation;
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.:
- Malliaropulos, Dimitrios, 1997. "A multivariate GARCH model of risk premia in foreign exchange markets," Economic Modelling, Elsevier, vol. 14(1), pages 61-79, January.
- Obstfeld, Maurice, 1986.
"Rational and Self-fulfilling Balance-of-Payments Crises,"
American Economic Review,
American Economic Association, vol. 76(1), pages 72-81, March.
- Maurice Obstfeld, 1986. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc.
- Imad Moosa & Razzaque Bhatti, 1997. "Are Asian Markets Integrated? Evidence for Six Countries Vis-A-Vis Japan," International Economic Journal, Korean International Economic Association, vol. 11(1), pages 51-67.
- Hassapis, Christis, 1995. "Exchange Risk in the EMS: Some Evidence Based on a GARCH Model," Bulletin of Economic Research, Wiley Blackwell, vol. 47(4), pages 295-303, October.
- Razzaque Bhatti & Imad Moosa, 1995. "An alternative approach to testing uncovered interest parity," Applied Economics Letters, Taylor and Francis Journals, vol. 2(12), pages 478-481.
- Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-48, September.
- Lee Scott Redding, 1996. "Noise Traders and Herding Behavior," IMF Working Papers 96/104, International Monetary Fund.
- Kraay, Aart, 2000.
"Do high interest rates defend currencies during speculative attacks ?,"
Policy Research Working Paper Series
2267, The World Bank.
- Kraay, Aart, 2003. "Do high interest rates defend currencies during speculative attacks?," Journal of International Economics, Elsevier, vol. 59(2), pages 297-321, March.
- Robert P. Flood & Peter M. Garber, 1980.
"Gold Monetization and Gold Discipline,"
NBER Working Papers
0544, National Bureau of Economic Research, Inc.
- Ahmed, S. & Ickes, B. & Wang, P. & Yoo, S., 1989.
"International Business Cycles,"
7-89-4, Pennsylvania State - Department of Economics.
- Goodhart, Charles A. E. & Payne, Richard G., 1996. "Microstructural dynamics in a foreign exchange electronic broking system," Journal of International Money and Finance, Elsevier, vol. 15(6), pages 829-852, December.
- Hong G. Min, 1998. "Dynamic capita mobility, capital market risk, and exchange rate misalignment : evidence from seven Asian Countries," Policy Research Working Paper Series 2025, The World Bank.
- Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
- Razzaque Bhatti & Imad Moosa, 1994. "A new approach to testing ex ante purchasing power parity," Applied Economics Letters, Taylor and Francis Journals, vol. 1(9), pages 148-151.
- George Furstenberg, 1998. "From Worldwide Capital Mobility to International Financial Integration: A Review Essay," Open Economies Review, Springer, vol. 9(1), pages 53-84, January.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).
If references are entirely missing, you can add them using this form.