콘텐츠 바로가기
로그인
컨텐츠

Category Open

Resources

tutorial

Collection of research papers and materials on development issues

home

Resources
Economy Macroeconomics

Print

Does a thin foreign exchange market lead to destabilizing capital-market speculation in the Asian Crisis countries? (English)

Related Document
Frame of Image
  • Does a thin foreign exchange market lead to destabilizing capital-market speculation in the Asian Crisis countries? (English)
  • Min, Hong G.; McDonald, Judith A.
  • World Bank (WB)


link
Title Does a thin foreign exchange market lead to destabilizing capital-market speculation in the Asian Crisis countries? (English)
Similar Titles
Material Type Reports
Author(English)

Min, Hong G.; McDonald, Judith A.

Publisher

World Bank (WB)

Date 1999
Language English
File Type Link
Subject Economy < Macroeconomics

Abstract

The authors investigate how the thinness of foreign-exchange markets causes destabilization speculation, especially when exchange-rate flexibility is increased, as it has been in the countries involved in the Asian crisis. They analyze the impact of this market thinness on the dynamic capital mobility and capital market risk of four countries involved in the Asian crisis: Indonesia, the Republic of Korea, Malaysia, and Thailand. Using the vector-autoregression model, impulse response functions, and variance decomposition, they show that in response to one-standard-deviation shock to interest and exchange rates, the dynamic capital mobility of all four countries decreases in the short run. These shocks also cause the capital market risk of these countries to rise. Since the onset of the Asian crisis, the countries involved responded by raising their interest rates and devaluing their currencies. These measures were intended to stem capital flight from the borrowing countries and to encourage capital inflows. But in an environment of protracted financial sector reform and thin foreign exchange markets, these standard policies did not stabilize capital inflows into these countries. The authors' research supports the view that because standard policies were unable to change institutional investors' (self-fulfilling) expectations and herding behavior, the countries' policies have, in the short run, not been successful. This failure is in large part attributable to the very thin foreign exchange markets in these Asian countries.