Contagion, Monsoons, and Domestic Turmoil in Indonesia: A Case Study in the Asian Currency Crisis

Sweta Saxena and Valerie Cerra

No 2000/060, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates whether Indonesia’s recent currency crisis was due to domestic fundamentals, common external shocks (“monsoons”), or contagion from neighboring countries. Markov-switching models attribute speculative pressure on Indonesia’s currency to domestic political and financial factors and contagion from speculative pressures in Thailand and Korea. In particular, the results from a time-varying transition probability Markov-switching model (which overcomes some drawbacks of previous methods) show that inclusion of exchange rate pressures from Thailand and Korea in the transition probabilities improves the conditional probabilities of crisis in Indonesia. There is also evidence of contagion in the stock market.

Keywords: WP; transition probability; Currency crisis; Contagion; Indonesia; Markov-switching models; crisis state; Indonesia's MPI; pressure in Thailand; exchange rate pressure; forecasted values; crisis in Indonesia; exchange rate crisis; confidence index; overvalued exchange rate; MSM result; MPIS from Thailand; Exchange rates; Real effective exchange rates; Probit models; Stock markets; Asia and Pacific; Global; East Asia; South Asia (search for similar items in EconPapers)
Pages: 26
Date: 2000-03-01
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Citations: View citations in EconPapers (14)

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