Lestano, L.

English

The 1980s and 1990s witnessed several episodes of financial turmoil, including the sovereign debt crisis of Latin America in the 1980s, the near-breakdown of the European Exchange Rate Mechanism (ERM) in 1992-1993 and the severe crisis that swept through Asian economies in 1997-1998. Three generations of theoretical models have been proposed to describe and explain such financial crises. The so-called first-generation models ars focussed on the Latin America debt crisis, which is characterised by weak macroeconomic fundamentals ... Zie: Samenvattin

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   University of GroningenThe Asian financial crisisLestano, L.IMPORTANT NOTE: You are advised to consult the publisher's version (publisher's PDF) if you wish to cite fromit. Please check the document version below.Document VersionPublisher's PDF, also known as Version of recordPublication date:2006Link to publication in University of Groningen/UMCG research databaseCitation for published version (APA):Lestano, L. (2006). The Asian financial crisis: identification, interdependence, and transmission. s.n.CopyrightOther than for strictly personal use, it is not permitted to download or to forward/distribute the text or part of it without the consent of theauthor(s) and/or copyright holder(s), unless the work is under an open content license (like Creative Commons).The publication may also be distributed here under the terms of Article 25fa of the Dutch Copyright Act, indicated by the “Taverne” license.More information can be found on the University of Groningen website: https://www.rug.nl/library/open-access/self-archiving-pure/taverne-amendment.Take-down policyIf you believe that this document breaches copyright please contact us providing details, and we will remove access to the work immediatelyand investigate your claim.Downloaded from the University of Groningen/UMCG research database (Pure): http://www.rug.nl/research/portal. For technical reasons thenumber of authors shown on this cover page is limited to 10 maximum.Download date: 04-06-2022nnssron oÍ currenct. cl.isesinancial shocks onto fourli i l ippines. and Thailancl.t ions. Dorriestic credit to; the aclverse shocks intodel developed bv Aghionrints through informationmodel embeds sliort-mnShocks can shift arr ecorr-\Ve nse this niodel set-upions into tu'o sets of idcn-rt-mn rcstrictions. rvhiclirnatir,elr'. we use long-r'unrtconres of the two sets ofrf the identif ication of thes delir,cr sinrilar vicws onrterest rate shocks. Withifving restrictions we inr-: orlr nioclcl is suitablc tcrmies to financial turmoil.Le irripulse-response fnrrc-erest and exchange raterre not so sensitive to ex-ic nronetarv contractiorrs.rrt nrore bv exchange ratenan\r cilses rvitir a recluc-pri'u'atc sector. The lattcrrl shocks' as predicted bvChapter 8Summary and conclusions8.1 SummaryThe 1980s and 1990s witnessed several episodes of firrancial turnioil.including the sovereign debt crisis of Latin Arnerica in the 1980s. thenear-breakdown of the European Exchange Rate \,,Ieclianism (ERNI) in1992-1993 and the severe crisis that swept tlirough Asian economiesin 1997-1998. Three generations of theoretical models have been pro-posed to describe and explain such financial crises. The so-called first-generation modeis are focussed on the Latin America debt crisis. which ischaracterised by weak macroeconornic fundamentals. Seconcl-generationmodels are developed to explain the European ERN,I crisis exposed bvspeculative attacks and self-fulfilling expectations. The Asian financialcrisis has different features. Prior to the crisis rn'idespreacl rnacroeco-nomic problems were not visible, the financial sector was at the centerof the crisis, and the economic effects of the crisis were clevastating.This crisis episode generated so-cailed third-generation mociels that at-tribute the Asian crisis to moral hazard, financial panics and fragilitv.or corporate balance sheets problems.This study deals with financial crisis in six Asian countries: Indone-sia, Malaysia, the Philippines, Singapore, South Korea, and Thailancl.We investigate three aspects of financial crises: identification, interde-pendence, and transmission. Our contribution is empirical rather thantheoretical. We first review irow financial crisis are identifieci, iooking atoperational criteria to define a financial crisis (currency, banking, ancldebt crisis) and the construction of leading indicators of the likeliirood ofa crisis. An eariy warning system (EWS) of currenc\r crises is designed tor37138 Sumniall' and concJusionsiclcntif'-v nracro-firiancial vrilrre-rabilitrr of ii countrv ancl to preclict a crisis.Tlie iriterclependence of crises between courrtries ancl triarkets is analysedwith synchronisation inclices ancl an analysis of dynamic conditional cor-lelatiou betr"n'een finarrcial rnarkets. Finallr', rve studir the transrnission ofexchange r:rte ancl policv reaction shocks to the rea,l clorriestic econonrvenrpha,sising tïre role of creclit constraints.Chapter 2 clescribes varir-rus nrethocls for clating Íinancial crises: theexchange nrarket pressure index lvitli an ad-hoc threshold. N,'Iarkov-srvitching ruoclels and extreme value models of currenc\r crises, and in-deptir rrleasurernent of banking arid clebt crises. We also discuss thesignificance of rnacro-fi.nancial vuinerabil itv ir idicators. Chapter 3 com-pares curr-crrcy crisis episocles iclentified b1' 11r" cxchange niarket pressureindex with zr so-cailecl acl-hoc thrc:sholcl zrnd thresholtls based on extrenievalue theorl'. We iudge the accuracy of these rnetliocls by confronting theoutcomes u'ith the ofhcial crisis event chronology provicled bv the IhIF,Chapter 4 presents an EWS rncldei of currencl' crises ivith 26 poten-tiari irrclicatols. wiricl i represent the conciit ions of the external sector (thecurrent arrd thc capitai accourrt). t l ie f inancial sector, t l ie cloniestic realscctor, the public sector. and tlie global econonry. \\re conrbine factoranarlysis arrcl a niultivariate logit rnoclel to generate the probability ofa currenct' crisis. Tlie perfol'rlranccr clf the urociel is er,'zrluated irr-sampleand out-of-sanrple.In Chzrpter 5 r,r'e clescribe bir,ariate ancl nnrltir.ariate corrcorclarrce in-dic:es fbr inrrestigating svnchronisation of low inciclence financiai crises,and analrrse their properties. The nrethociologv is i l lustratecl u,ith tinreseries of binary variables of culrencv. bau.king. ancl clebt crises. Arr ap-pliczrtiori to the six Asian courrtries reveals the extent of ccincordarrce incrises botli b1. country' ancl asset nrarket.Chapter 6 investigates the interdcpenderice of three firrancial niar-kets: the exchange, rrroney, ancl stock rnzrlket. \Vc fir'st revien tlie rel-e.\'arlt theorv and entllirical cr,'iclerrce. Using dailr,' data, \\re apph' thelniltiv:r,riate Gcnertrlisecl Antoregressive Conditiorr:rl Heterosceclasticitl'rnocle.l anrl D\.nauric Corrditional Corlelatiori rnodei to analvse dvnanricrelationships bctin'r:en firra,rrciai ma,rkets irr tlvo of tirc six Asian courrtries.Inclorcsitr, arxl Thaiiancl. and àcloss borclers. The clr.narrric linkages arer'opr'osentecl ry ptrttcrns of coriclitiorral con'cltrtiolui o\:cr tirne aricl aclosscountrics turcl rntr,rkets.Chapter 7 exarri irres tire transrnissiorr of exchange rate aricl interestrate slrocks to tirc real rlorriestic econoniv in foul Asiart coritrtrics: Irtclone-rr.ullilry illtd concJusiors'r 'ancl t<t predict a crisis.ancl rritrlkets is analt'sccllr 'nauiic conditional cor-tudv thc transnrissiorr ofr leal dornestic ecorrolrrvting financial crises: thehoc thresholi l. Nlarkov-currellcv clises. and in-es. \\ 'e also discuss the:icators. Cliapter 3 com-rcharr g^c nrarket pressuresholcls basccl on extremetliods ltv corrfronting ther5r 'provic lccl  bv thc I \ IF.Lcv crises rvith 26 poten-: t l ie exterrral sector (the;ector" the clonicstic real,nn'. \\'e conrbine factorerate tlie pr-obabilitr,'- of' l  is eralrrated irr-strnrplcivariate concorclance in-rcideuce finrrrrcial crises.is illLrstratecl rvitli tinicand debt crises. An ap-:xterrt of concordzrnce inof thlcc financial nrar-\\'e first rer.ielv the rel-rilv clata. \\rer apph. tlr.eional Hctcloscccitr,sticitr.lclel to analvse ch'narrric;' the s ix Asi tur  corurt l ies..re cir-rrzrrrric lirrkagcs arc)ns o\-er tinre zurcl rrcrclsslrtruge late trrrd iutclcstAsian countrics: Inclorre.-8.2. Conclusiotti 39sia, NÍalrysia, the Philippines. and Thailand. we use a, third-generatiorrtheoretical rnodel of financial crises with emphasis on credit constrai.tsto identify our Structural Vector Autoregression rnodel. Trvo tvpes ofrestrictions-short-run arrd long-run are imposed to iclentif'v the struc-tulai rnodel parameters. By rneàns of impulse response fllctions anclvariance deconrpositions, wc anaiyse the role of dornestic creclit as atratrsntission channel. Our Íincling supports the 'crcciit channel of a cur-rericy crisis'.8.2 Conclusion\Ve stttnnarise our corlclusions uncler the heaclings identiÍicatio1. i 'ter-dependence. and transrnission.IdentificationAs is the case for all other approaches used to iclentify currelcy crisisperiods, our corlparison of currency clating nrethocls does not vielcl a'unambigtlous standard. Different currencv crises dating rnethods gener-ate different numbers of crises episocles ancl ei,rch rnethod is sensiti,n,e toits own threshold, i.€., a reiatively lower thresholcl produces Sigher inci-deuces of crisis episodes, anci vice-versa. Theory cloes not provide a for-mal def ition of a currerrcy crisis. H.nce, tirere is rrardl' a wa)r to jrrdgethe quality of these multiple lretliocls. Given the official INIF c:hronol-ogv of the 7997-1998 Asian crisis, orlr conlparison shorns the Kanri'skv.Lizondo, and Reinhart nroclifiecl inclex based metliocl àppears to dorni-ttate, since this rnethocl corifornts better in terms of capturirrg tire INIFchronolog)' of el'ents i' the ec.'o.ries exa'rinecl.Financiai crises are clifficult to preclict. since thev are 6y laturc u'-certain' Some leacling inclica,tors of our trWS nroclel poirrt tá tnc so*rcesof frindanrcntal weaknesses. Earlv warning nroclels help to iclentify t6einclicators of a crisis, but the nroclel cioes relativelv poorl;,. in predictingthe exact tirning of crises. Otrr anah'sis in Chapter 4 provicles insigirtinto whicir va,riables rnerit ntore scrutinv. In particular. rvc firrcl that irn_llortant irrdicators of vulnerabilitrr are the growth rates of rnoncv (NI1a'nd 1\{2). irnports, GDP per capita. ancl rratiolal savings. For t5e firsttwo of tliese indicators, tlie rcsults are consistent with stor.ies of thcorigirrs of curretrcy crises: for othcrs there is rro obvious link. The per-fonnatrcc of tlie g|owtli rates of nrone'r' arrrl irriports as arr inrlicator of

The Asian financial crisis:identification, interdependence, and transmission

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The Asian financial crisis:identification, interdependence, and transmission

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