ANALYSIS OF THE ASIAN CRISIS
From Dickinson College Wiki
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
- transactions involve buying/selling of bank deposits in different currencies for investment.
- Non-bank financial institutions (pension funds, insurance funds) may buy/sellforeign assets.
- Private firms: conduct foreign currency transactions to buy/sell goods, assets or services.
- 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.
