Mar 26 2006
Asian Financial Crisis Study Notes
In ECON 471 Open Economy Macro, we did a group presentation on AFC.
Class presentation in PowerPoint.
Research notes and supporting data.
Some highlights:
AFC lasted only about 8 month. However, during that 8-month, more than 20 million people lost their jobs. Those still had their jobs took a double-digit pay cut on average.
Historical Context
Prior Crisis: Mexico peso 1994-5, European Monetary System 1992
“The East Asia Miracle”
In relation to Globalization
Regardless what political factors may be involved, we have to accept the premise that AFC was in its core an economic affair.
Listen to the Devil. The Devil here are the currency speculators. There is a nicer term for them: macro hedge fund.
For emerging economies, fragmented financial market poses an acute problem. In the case of South Korea, most of the short term loans were borrowed by banks themselves.
Financial crisis, especially those caused by predatory attacks, are difficult to stop once it started. During AFC, Hong Kong was able to defend its currency. Thailand almost succeeded but the levee broke at the last minute.
The first sign of currency vulnerability happened in early May 1997 when Japan hinted that it might raise interest rates to defend the yen. (See “A Brief Review” in research notes)
One of the most comprehensive, in-depth studies of the causes of AFC is the report titled “What Caused the Asian Currency and Financial Crisis” authored by Corsetti, Pesenti and Roubini . Authors are in the structual, moral hazzard camp. Paper written in 1998 (See “What We Have Learned” in research notes)
IMF’s role in AFC best described in Bluestein’s The Chastening: Inside the Crisis That Rocked the Global Financial System and Humbled the IMF. (may file a separate blog)
In the “Chronicle Trade Imbalance” section in research notes:
As discussed in Corsetti, Pesenti and Roubini paper, chronicle trade imbalance in emerging markets is most likely a sign of economic vulnerability.
Bretton Woods 2 System (BW2). The concept was first proposed in a series of influential papers by economists Michael Dooley, David Folkerts-Landau and Peter Garber. The authors argue that the fixed exchange rate arrangement in the original Bretton Woods System has now been replaced by a new de facto fixed rate arrangement centered on the trade-imbalance between the U.S. and China.
The large current account deficit has not eroded U.S. reserve. Judged by data published by Commerce Department’s Bureau of Economic Analysis, from 1998 to 2005, U.S. has actually increased its net foreign reserve balance—albeit very slightly.
Summary and comments on Roger W. Ferguson, Jr. Oct. 2004 speech: Interestingly, he says everything is not but not something is: personal savings is not as alarming, foreign indebtness is not sustainable, asset price is not a true reflection of productivity … but not: low personal savings is OK, foreign lending is the only source available now, asset price is a bubble. A very clear message indeed.