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

Sang Seok Lee () and Paul Luk

Journal of Economic Dynamics and Control, 2018, vol. 90, issue C, 284-309

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.

Keywords: The Asian Financial Crisis; International reserves; Structural breaks; Model uncertainty; Robust control and learning (search for similar items in EconPapers)
JEL-codes: D81 D83 F41 (search for similar items in EconPapers)
Date: 2018
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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