Financial Sector Reforms and Currency Crisis: The Indonesian Experience
The theory of exchange rate determination clearly links a depreciating currency to a deteriorating trade balance, interest differential and related economic fundamentals. Empirical testing carried out routinely confirms these relationships in â€œnormalâ€ times as currencies constantly align themselves to find their places in the global marketplace. When depreciation reaches crisis proportions, they are not always caused by a proportional deterioration in economic fundamentals. Random activities like speculative attacks are prompted by perceived problems in the banking sector as well as the contagion effect, leading to a currency crisis. Using pre crisis data and focusing on the Indonesian rupiah, this view is confirmed in the research.
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