Question

1. What were the origins of the Asian currency crisis?
2. What role did expectations play in the Asian currency crisis?
3. How did the appreciation of the U.S. dollar and depreciation of the yuan affect the timing and magnitude of the Asian currency crisis?
4. What is moral hazard and how did it help cause the Asian currency crisis?
5. Why did so many East Asian companies and banks borrow dollars, yen, and Deutsche marks instead of their local currencies to finance their operations? What risks were they exposing themselves to?

During the second half of 1997, and beginning in Thailand, currencies and stock markets plunged across East Asia, while hundreds of banks, builders, and manufacturers went bankrupt. The Thai baht, Indonesian rupiah, Malaysian ringgit, Philippine peso, and South Korean won depreciated by 40% to 80% apiece. All this happened despite the fact that Asia’s fundamentals looked good: low inflation; balanced budgets; well-run central banks; high domestic savings; strong export industries; a large and growing middle class; a vibrant entrepreneurial class; and industrious, well-trained, and often welleducated workforces paid relatively low wages. But investors were looking past these positives to signs of impending trouble. What they saw was that many East Asian economies were locked on a course that was unsustainable, characterized by large trade deficits, huge short-term foreign debts, overvalued currencies, and financial systems that were rotten at their core. Each of these ingredients played a role in the crisis and its spread from one country to another.



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  • CreatedJune 27, 2014
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