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The Asian Financial Crisis and international reserve accumulation: A robust control approach

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  • Lee, Sang Seok
  • Luk, Paul

Abstract

Standard macroeconomic models have difficulties accounting for the surge in international reserves of Asian countries in the aftermath of the Asian Financial Crisis of 1997. We propose precautionary demand for saving generated by model uncertainty as an important driver of this phenomenon. Using Korean data, we estimate a simple permanent income model augmented with model uncertainty, find a structural break at the point of the Asian Financial Crisis, and identify a rise in concern for model misspecification which is distinct from an increase in income volatility. The post-crisis concern for model misspecification implies a reasonable detection error probability. We also show that learning serves as an additional powerful amplification mechanism in our framework.

Suggested Citation

  • Lee, Sang Seok & Luk, Paul, 2018. "The Asian Financial Crisis and international reserve accumulation: A robust control approach," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 284-309.
  • Handle: RePEc:eee:dyncon:v:90:y:2018:i:c:p:284-309
    DOI: 10.1016/j.jedc.2018.03.010
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    2. Huang, Yun & Luk, Paul, 2020. "Measuring economic policy uncertainty in China," China Economic Review, Elsevier, vol. 59(C).
    3. Zhan, Minghua & Li, Shuai & Wu, Zhouheng, 2023. "Can digital finance development improve balanced regional investment allocations in developing countries? — The evidence from China," Emerging Markets Review, Elsevier, vol. 56(C).

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    More about this item

    Keywords

    The Asian Financial Crisis; International reserves; Structural breaks; Model uncertainty; Robust control and learning;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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