Real exchange rate overvaluation and currency crisis: evidence from Thailand

Juthathip Jongwanich

Applied Economics, 2008, vol. 40, issue 3, 373-382

Abstract: This article examines real exchange rate (RER) misalignment in Thailand in the lead-up to the 1997-1998 currency crisis. The methodology involves estimating the long-run equilibrium RER based on the internal and external balance approach. RER misalignment is measured by comparing the actual RER with the estimated long-run equilibrium RER. The results suggest that there was a persistent RER overvaluation from 1991 up to the onset of the crisis in 1997. 'Too much' net short-term capital inflows and government expenditure expansion were the main contributory factors. After the massive depreciation of nominal exchange rate during the crisis, the RER seems to have gradually returned to its long-run equilibrium level.

Date: 2008
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DOI: 10.1080/00036840600570961

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