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A dynamic model of export competition, policy coordination and simultaneous currency collapse

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  • Chan Huh
  • Kenneth Kasa

Abstract

This paper offers a game-theoretic interpretation of the recent currency crisis in Asia. Specifically, we argue that the 'price wars during booms' logic of Rotemberg and Saloner (1986) can be used to explain the nearly simultaneous devaluation of several Asian currencies during the summer of 1997. The idea is as follows. Since each of these countries relies heavily on exports to the U.S. pressures for competitive devaluations naturally arise. ; We view the historical tendency of these countries to peg to the dollar as a way to avoid these pressures. However, it must be in the self-interest of each country to adhere to its peg, and we argue that an adverse common external the arrangement requires a collective devaluation that reduces the unilateral incentive to devalue, argue that China's 1994 devaluation can be interpreted as this adverse common shock. The novelty of our interpretation is that it views the recent currency crisis as part of a dynamic strategically cooperative equilibrium, as opposed to a single isolated event.

Suggested Citation

  • Chan Huh & Kenneth Kasa, 1997. "A dynamic model of export competition, policy coordination and simultaneous currency collapse," Pacific Basin Working Paper Series 97-08, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfpb:97-08
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    References listed on IDEAS

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    Cited by:

    1. Ramkishen S. Rajan & Rahul Sen & Reza Y. Siregar, 2002. "Hong Kong, Singapore and the East Asian Crisis: How Important were Trade Spillovers?," The World Economy, Wiley Blackwell, vol. 25(4), pages 503-537, April.
    2. Glick, Reuven & Rose, Andrew K., 1999. "Contagion and trade: Why are currency crises regional?," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 603-617, August.
    3. Chinn, Menzie D., 2000. "Before the fall: were East Asian currencies overvalued?," Emerging Markets Review, Elsevier, vol. 1(2), pages 101-126, September.
    4. Kenneth Kasa, 1998. "Borrowing constraints and asset market dynamics: evidence from the Pacific Basin," Economic Review, Federal Reserve Bank of San Francisco, pages 17-28.
    5. Roberta De Santis, 2004. "Has Trade Structure Any Importance in the Trasmission of Currency Shocks? An Empirical Application for Central and Eastern European Acceding Countries to Eu," ISAE Working Papers 43, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    6. Fernald, John & Edison, Hali & Loungani, Prakash, 1999. "Was China the first domino? Assessing links between China and other Asian economies," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 515-535, August.
    7. AndrewK. Rose & MarkM. Spiegel, 2010. "Cross-Country Causes And Consequences Of The 2008 Crisis: International Linkages And American Exposure," Pacific Economic Review, Wiley Blackwell, vol. 15(3), pages 340-363, August.
    8. Leila Ali & Yan Kestens, 2006. "Contagion and Crises Clusters: Toward a Regional Warning System?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 142(4), pages 814-839, December.
    9. Ramkishen S. Rejan, 1998. "The Currency And Financial Crisis In Southeast Asia - A Case Of `Sudden Deathã¢Â‚¬Â„¢ Or `Death Foretoldã¢Â‚¬Â„¢," Macroeconomics Working Papers 22381, East Asian Bureau of Economic Research.
    10. Reuven Glick, 1998. "Thoughts on the origins of the Asia crisis: impulses and propagation mechanisms," Pacific Basin Working Paper Series 98-07, Federal Reserve Bank of San Francisco.
    11. Reuven Glick & Ramon Moreno, 1999. "Money and credit, competitiveness, and currency crises in Asia and Latin America," Pacific Basin Working Paper Series 99-01, Federal Reserve Bank of San Francisco.
    12. John G. Fernald & Hali J. Edison & Prakash Loungani, 1998. "Was China the first domino? assessing links between China and the rest of emerging Asia," International Finance Discussion Papers 604, Board of Governors of the Federal Reserve System (U.S.).
    13. Jose Antonio R. Tan, III, 1998. "Contagion effects during the Asian financial crisis: stock price data," Pacific Basin Working Paper Series 98-06, Federal Reserve Bank of San Francisco.

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