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THE EAST ASIAN CURRENCY CRISIS: CAUSES AND LESSONS
Author(s) -
KAWAI MASAHIRO
Publication year - 1998
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/j.1465-7287.1998.tb00509.x
Subject(s) - currency , economics , exchange rate , depreciation (economics) , monetary economics , foreign exchange risk , capital account , market liquidity , devaluation , balance sheet , international economics , financial system , finance , financial capital , capital formation , market economy , human capital
Financial deregulation and capital‐account liberalization preceded speculative currency attacks in Thailand. A combination of de facto fixed exchange rates and high rates of interest generated excessive capital inflows, which led to too much liquidity chasing bad investments. The under‐supervised and over‐guaranteed financial sector extended loans excessively, particularly for non‐productive, speculative purposes. Non‐transparent practices, in the form of weak disclosure of institutions' true balance sheets and insider relations, masked these poor investments. The buildup of short‐term, unhedged debt left East Asian economies vulnerable to a sudden collapse of confidence. Currency attacks ran down official foreign exchange reserves. Rapid capital outflows and the consequent depreciation of currencies exacerbated the strains on private sector balance sheets. The policy lessons are to (i) use macroeconomic policy to avoid excessive capital inflows and currency overvaluation, (ii) strengthen the financial system, with proper disclosure and accounting requirements, stringent loan classification and provisioning rules, and capital adequacy requirements, prior to capital‐account liberalization, (iii) stabilize exchange rates based on currency baskets that reflect trade and investment linkages, and (iv) develop regional. financial cooperation with regional surveillance and peer pressure to maintain policy discipline.