International Capital Movement and Currency Crisis: A Revaluation of the Asian Crisis (in Japanese)

Shinji Takagi, Kazuo Yokokawa, Hiroshi Shibuya, Ryuzo Miyao, Yasuyuki Sawada, Satoshi Urasawa, Yoshinori Kinoshita, Kensho Hashikawa, Hidetoshi Tanaka and Hitoshi Maeda

Economic Analysis, 2002, vol. 165, 3-137

Abstract: In the latter half of 1997, a currency crisis, having spread over East Asia within a few months after the collapse of the Thai baht, sparked one of the most wide-ranging debates of the 20th century on the both economic theory and policy-making. From the 1980s to the 1990s, the East-Asian emerging market economies recorded high economic growth led by enormous amounts of capital inflows from developed countries under the premise of regulated macroeconomic policy, a stable dollar-pegged exchange system, and the liberalization of domestic and foreign financial transactions. However, such high growth backed by international capital inflows was not permanent. In Thailand, revelations of serious problems in the economy such as the collapse of asset inflation, the fragility of financial system, shadows in export increases, and others caused a wave of baht speculative attacks that eventually led to the currency crisis in July 1997, just after the central bank allowed a sharp drop in the value of the baht. Moreover, although a causal relationship is not clear, Thailand's currency crisis spread to other East Asian countries including Malaysia, Korea, and Indonesia, and triggered the outbreak of what came to be known as the Asian currency crisis.The Asian currency crisis became a matter of concern not only because of the negative impact it exerted on the world and regional economies, but rather because it occurred in the economies that seemed to be supported by good fundamentals and considered healthy from both policy management and economic performance points of view. Nevertheless, the post-crisis evaluation demonstrated that the economic policy of East Asian countries before the crisis was not completely adequate. The significance of the Asian currency crisis was that the new market economies had considerable difficulties in controlling international economic integration in the midst of separate currencies and separate economic policy-making sovereignties. On the other hand, the Asian currency crisis stimulated the development of theoretical currency crisis models. Essentially, the prototypes of currency crisis models are the models constructed to explain the current balance of payments crisis in Latin America in the 1980s and the crisis of European Monetary System in the early 1990s. The literature showed a rapid progress with the Asian crisis. The central focus of this paper is whether a currency crisis is an inevitable crisis caused by fundamentals as explained in so-called the "first-generation model", or is it a self-realizing crisis unnecessarily caused by market expectations and herd behavior as explained in so-called the "second-generation model"? This paper analyzes all aspects of Asian currency crisis (and currency crises in general), taking into account theoretical and policy-making points. From the standpoint of economic policy-making, we analyze three themes concerning capital inflows: sustainability of capital inflows (Chapter 2), endogenous nature of the capital inflows in monetary and exchange policy (Chapter 3), and the possibility of avoidance of exchange risk in capital inflows (Chapter 4). We develop an analytical model that analyzes currency crises from a realistic viewpoint as a movement between multiple equilibria that are immanent in economic development of emerging markets (Chapter 1) and a model that incorporates currency substitution into the "first-generation model", suggesting new factors of currency crises (Chapter 5). Chapters 1 and 4 focus on theoretical analysis, Chapters 2 and 3 attach weight to empirical analysis, and Chapter 5 includes both analytical and empirical analyses. The research consists of five chapters

Date: 2002
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