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Currency crises: is Asia different?

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  • Diehl, Markus
  • Schweickert, Rainer

Abstract

International investors' enthusiasm with respect to growth prospects in Southeast Asia has been followed by panic. Both the outstanding economic performance of Southeast Asian economies and their ability to master adjustment challenges had led most observers of these economies to the conclusion that "Asia is different". In comparison with previous currency crises, the macroeconomic fundamentals (GDP growth, inflation, fiscal deficit, external indebtedness, domestic savings, export performance) in the Southeast Asian economies seemed to be consistent with the fixed or quasi-fixed exchange rate regimes. Even large current account deficits were not classified as "high risk" although the vulnerability of Southeast Asian countries had increased during the last decade due to a surge in capital inflows, a construction boom, the appreciation of the US dollar, and the liberalization of domestic financial markets without strict enforcement of prudential standards. Early signals of vulnerability should have warned domestic policymakers to take precautionary measures such as more exchange rate flexibility to end sterilization policies, higher marginal reserve requirements, and prudential standards for bank lending to reduce the risk exposure of banks. Some of these measures were taken in 1996, but apparently it was too little or too late. In the aftermath of the crisis, the enforcement of prudential rules in the financial sector and the clearing of bad debt figure high on the policy agenda. In order to help financial restructuring, fiscal and monetary policies should not be overly restrictive. The role of external assistance is ambiguous because of negative incentive effects. The currency crises in Asia boosted the amounts of emergency lending by the IMF and other countries, which may raise expectations that defaults will become cheaper in the future. Moreover, officially implemented early warning systems may easily produce the bad news which triggers exchange rate crises. All in all, Asia is not different from other regions. High current account deficits and real appreciation expose countries with fixed or quasi-fixed exchange rates and fragile domestic financial markets to the risk of a reversal of capital inflows. This mounting risk position can lead to a crisis when bad news arrives and domestic measures are delayed. Therefore, Asia could have learned from previous currency crises in Latin America and Europe: first, extreme solutions for the exchange rate regime (currency boards or a passive crawling peg with wide intervention bands) work best; second, deregulated goods and factor markets with strict prudential supervision (especially in the phase of financial liberalization) are necessary preconditions for a stable fixed exchange rate regime; third, development models with discretionary government interventions face difficult times since the globalization of goods and factor markets renders economic plans of today obsolete tomorrow. --

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy (IfW) in its series Kiel Discussion Papers with number 309.

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Date of creation: 1998
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Handle: RePEc:zbw:ifwkdp:309

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  1. Bernhard Fischer & Helmut Reisen, 1992. "Towards Capital Account Convertibility," OECD Development Centre Policy Briefs 4, OECD Publishing.
  2. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Contagious Currency Crises," NBER Working Papers 5681, National Bureau of Economic Research, Inc.
  3. Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
  4. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
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  9. Schweickert, Rainer, 1992. "Geld- und Wechselkurspolitik in Argentinien und Chile 1970 - 1988 : ein Vergleich," Open Access Publications from Kiel Institute for the World Economy 1512, Kiel Institute for the World Economy (IfW).
  10. Delano Villanueva & Abbas Mirakhor, 1990. "Strategies for Financial Reforms: Interest Rate Policies, Stabilization, and Bank Supervision in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 37(3), pages 509-536, September.
  11. Uwe Corsepius, 1989. "Liberalisation of the capital markets in developing countries," Intereconomics: Review of European Economic Policy, Springer, vol. 24(5), pages 220-226, September.
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  13. Langhammer, Rolf J. & Schweickert, Rainer, 1995. "The Mexican reform process : improving long-run perspectives and mastering short-run turbulences," Kiel Discussion Papers 255, Kiel Institute for the World Economy (IfW).
  14. 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.
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  16. Velasco, Andres, 1987. "Financial crises and balance of payments crises : A simple model of the southern cone experience," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 263-283, October.
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Citations

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Cited by:
  1. Golder, Stefan M., 1999. "Precautionary credit lines: A means to contain contagion in financial markets?," Kiel Discussion Papers 341, Kiel Institute for the World Economy (IfW).
  2. Peter Nunnenkamp, 1998. "Dealing with the Asian crisis," Intereconomics: Review of European Economic Policy, Springer, vol. 33(2), pages 64-72, March.
  3. Nunnenkamp, Peter, 1998. "Wirtschaftliche Aufholprozesse und Globalisierungskrisen in Entwicklungsländern : Implikationen für die nationale Wirtschaftspolitik und den globalen Ordnungsrahmen," Kiel Discussion Papers 328, Kiel Institute for the World Economy (IfW).
  4. Diehl, Markus & Nunnenkamp, Peter, 2001. "Lehren aus der Asienkrise : wirtschaftspolitische Reaktionen und fortbestehende Reformdefizite," Kiel Discussion Papers 373, Kiel Institute for the World Economy (IfW).
  5. Nunnenkamp, Peter, 2000. "Boom, bust, recovery - what next in private capital flows to emerging markets?," Kiel Discussion Papers 362, Kiel Institute for the World Economy (IfW).
  6. Buch, Claudia M. & Heinrich, Ralph P. & Pierdzioch, Christian, 1998. "Taxing short-term capital flows - An option for transition economies?," Kiel Discussion Papers 321, Kiel Institute for the World Economy (IfW).
  7. Gern, Klaus-Jürgen & Gottschalk, Jan & Scheide, Joachim & Schlie, Markus & Strauß, Hubert, 1998. "Leicht gedämpfter Aufschwung in der Weltwirtschaft," Open Access Publications from Kiel Institute for the World Economy 1759, Kiel Institute for the World Economy (IfW).
  8. Marcel Fratzscher, 1998. "Why are currency crises contagious? A comparison of the Latin American Crisis of 1994–1995 and the Asian Crisis of 1997–1998," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 134(4), pages 664-691, December.

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