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Contagion, Monsoons, and Domestic Turmoil in Indonesia's Currency Crisis

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  • Cerra, Valerie
  • Saxena, Sweta Chaman

Abstract

The paper investigates whether Indonesia's recent currency crisis was due to domestic fundamentals, common external shocks ("monsoons"), or contagion from neighboring countries. Markov switching models attribute speculative pressure on Indonesia's currency to domestic political and financial factors and contagion from speculative pressures in Thailand and Korea. In particular, the results from a time-varying transition probability Markov switching model (which overcomes some drawbacks of previous methods) show that inclusion of exchange rate pressures from Thailand and Korea in the transition probabilities improves the conditional probabilities of crisis in Indonesia. The paper also finds evidence of contagion in the stock market. Copyright 2002 by Blackwell Publishing Ltd.

Suggested Citation

  • Cerra, Valerie & Saxena, Sweta Chaman, 2002. "Contagion, Monsoons, and Domestic Turmoil in Indonesia's Currency Crisis," Review of International Economics, Wiley Blackwell, vol. 10(1), pages 36-44, February.
  • Handle: RePEc:bla:reviec:v:10:y:2002:i:1:p:36-44
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