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Vulnerability to a Currency Crisis: Lessons from the Asian Experience
Author(s) -
Athukorala Premachandra,
Warr Peter G.
Publication year - 2002
Publication title -
world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/1467-9701.00419
Subject(s) - currency crisis , economics , currency , financial crisis , vulnerability (computing) , monetary economics , boom , context (archaeology) , exchange rate , foreign exchange risk , international economics , macroeconomics , geography , computer security , archaeology , environmental engineering , computer science , engineering
Are currency crises caused by manias and panics in financial markets, or by unsustainable deteriorations in domestic macroeconomic conditions? This question is explored in the context of the recent Asian currency crisis. The theoretical concept of vulnerability is used to identify three early‐warning indicators of susceptibility to a currency crisis: rapid accumulation of mobile capital; domestic lending booms; and overvalued exchange rates. It is shown that the crisis and noncrisis countries of Asia may be distinguished empirically, using these indicators, over the decade preceding the crisis. This exercise provides convincing evidence that the crisis emanated largely from domestic macroeconomic conditions.