The Asian Crisis: a Perspective after Ten Years

W. Max CordenDepartment of EconomicsUniversity of Melbourne

Introduction

0Focus on four nations: Thailand, Indonesia, Malaysia, Korea0The fundamental causes and trigger0Financial crisis and exchange rate regime0Policy responses0Special features of the four nations

The Boom

0Financed by both local savings and by foreign capital inflow

0Three forms of foreign capital inflow: 1. FDI 2. portfolio capital into local stock markets 3. short-term borrowing

The Bust and The Trigger

0Fundamental cause: investment booms that ended in a period of ‘irrational exuberance’

0Trigger in Thailand: domestic and external factors collapse in exports growth rate increase in current account deficit exchange rate crisis (depreciation of Thai)0Trigger of the other three countries: Thai Baht depreciation

Exchange Rate Regime and Crisis

0East Asian Crisis Exchange Rate Crisis

0Fixed Exchange-rate System: not perceive hedginggovernments try to keep the value of their currencies constant against another (usually US dollars)

0Floating Exchange Regime: perceive hedging a currency's value is allowed to fluctuate according to the foreign exchange market.

Currency Mismatch- Unhedged Foreign Borrowing

0Apply to Indonesia, Thailand and Korea

0Balance Sheet Effects —unhedged foreign borrowing denominated in foreign currency:

international short-term borrowing in dollars domestic lending in local currency domestic currency depreciation

Recession

0Decline in Investment 0Financial crisis due to excessive domestic lending and

decline in assets value0Reduction of private consumption 0Currency mismatch on Balance Sheet

The Policy Responses

0Moderate the Depreciation0Rescue the Banks0Keynesian Demand Expansion Various increases in public expenditure Public sector infrastructure investment Deliberate reductions in interest rates

Special Features of Four Countries

0Thailand: Fixed-but-adjustable Exchange rate Regime(FBAR)

0 Indonesia: economic problem interacted with political problem

0Korea: achieve more assistance from IMF and US faster recovery 0Malaysia: have no currency mismatch problem government control on short-term capital outflow

Conclusion

0Boom0Bust and Trigger0Recession0The Policy Responses 0Special Features of Four countries

Thank You!