How Much Did Excess Debt Contribute to the 1997 Currency Crisis in Korea?

Duo Qin

No 407, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: It is widely believed that seriously excess debt problems form a major cause of the 1997 Asian financial crisis. This paper investigates empirically the role of the debt problems with respect to both the won/$US rate fluctuations and the won collapse in November 1997. The problems are represented by two institutional variables in nonlinear equilibrium-correction models. The variables are found to exert positive feedback effects on the won rate returns in three forms: disequilibrium in levels, short-run shocks and explosive bubbles. However, the estimated effects are not so singly conspicuous as to serve as the predictor of a likely crash in the won rate in late 1997. Excess debt is hence found to only constitute one of the many factors which brought about the 1997 won collapse.

Keywords: Disequilibrium; Currency crisis; Excess debt; Institutional variable; Self-fulfilling effect; Intrinsic bubble; Soft-budget constraint (search for similar items in EconPapers)
JEL-codes: D50 E22 E44 F31 F34 F41 G20 O16 O23 O53 (search for similar items in EconPapers)
Date: 1999-07-01
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Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:407

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