ANALYSIS OF THE ASIAN CRISIS

INTRODUCTION

• An analysis of the East Asian crisis.

OVERVIEW OF EXCHANGE RATES

• Exchange rates are quoted as foreign currency per unit of domestic currency or domestic currency per unit of foreign currency.
• Exchange rate allows us to denominate the cost or price of a good or service in a common currency.
• Depreciation is a decrease in the value of a currency relative to another currency.
• Appreciation is an increase in the value of a currency relative to another currency.

THE FOREIGN EXCHANGE MARKET

• It is the financial market where exchange rates are determined.
• Participants of the foreign exchange market are:

Commercial banks and other depository institutions

1. transactions involve buying/selling of bank deposits in different currencies for investment.
2. Non-bank financial institutions (pension funds, insurance funds) may buy/sellforeign assets.
3. Private firms: conduct foreign currency transactions to buy/sell goods, assets or services.
4. Central banks: conduct official international reserves transactions.

CAUSES OF THE ASIAN CRISIS

• Heavy investment in highly speculative in real estate ventures.
• There was a decrease in export due to the appreciation of the dollar against the yen.
• Overbuilding of real estate.
• Decrease in stock prices due to the drop in real estate prices.
• The deterioration in the balance sheet of banks due to increasing loan losses.
• Adverse selection and moral hazard problems.
• Increase in interest rates.
• Increase in uncertainty.
• Unsustainable current account deficits
• Over-dependence on short-term foreign funds.
• Poor regulation of the economy.
• Over-inflated asset prices.
• Macroeconomic policy: Fixed exchange rates.