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Financial Sector Reforms and Currency Crisis: The Indonesian Experience

Author

Listed:
  • Shakur, Shamim
  • Obben, James
  • Nugroho, Agus Eko

Abstract

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 “normal†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.

Suggested Citation

  • Shakur, Shamim & Obben, James & Nugroho, Agus Eko, 2005. "Financial Sector Reforms and Currency Crisis: The Indonesian Experience," Review of Applied Economics, Review of Applied Economics, vol. 1(2).
  • Handle: RePEc:ags:reapec:50271
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    File URL: http://purl.umn.edu/50271
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    References listed on IDEAS

    as
    1. David Cole & Betty Slade, 1998. "Why Has Indonesia's Financial Crisis Been so Bad?," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 34(2), pages 61-66.
    2. Sachs, Jeffrey & Tornell, Aaron & Velasco, Andres, 1996. "The Mexican peso crisis: Sudden death or death foretold?," Journal of International Economics, Elsevier, vol. 41(3-4), pages 265-283, November.
    3. 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.
    4. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part I: A Macroeconomic Overview," NBER Working Papers 6833, National Bureau of Economic Research, Inc.
    5. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    6. Miller, Victoria, 2000. "Central bank reactions to banking crises in fixed exchange rate regimes," Journal of Development Economics, Elsevier, vol. 63(2), pages 451-472, December.
    7. Saxena, Sweta Chaman, 2002. "Exchange rate dynamics in Indonesia: 1980-1998," Journal of Asian Economics, Elsevier, vol. 13(4), pages 545-563.
    8. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The "Overborrowing Syndrome"," NBER Chapters,in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
    9. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part II: The Policy Debate," NBER Working Papers 6834, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Currency Crisis; Indonesia; Exchange Rate; Financial Economics; F31; F41;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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