Equilibrium Real Exchange Rates and Asian Financial Crisis

Abstract

A huge depreciation in currency value was a significant symptom of the Asian Financial Crisis. Based on the observation, existing literatures like Corsetti, Pesenti & Roubini (1998), Radelet & Sachs (1998), Calvo & Vegh (1999), and Chen, Hu & Wu (1999), Ho(2003), and Caporale, Cipollini & Demetriades (2005) argued that an inappropriate exchange rate policy was one of the main factors causing the crisis. Our empirical results show countries like the Philippines, Indonesia, Thailand, Singapore and Malaysia did have an over-valuation of their currencies. However, for countries such as Japan, Korea and Taiwan, their actual real exchange rates in fact were larger than the model estimated the equilibrium real exchange rates. This implies that, for some countries which experienced a drastic depreciation of their currencies during the Asian financial crisis, it was riot because of inappropriate market fundamentals, but rather because of self-fulfilling effects or contagion effects.