W10 - Asian Financial Crisis and the GFC Flashcards
Key, the main essay question is likely to be on this
What did the AFC symbolise?
The end of the high growth era of SE Asia
What was the impact of Confucian ethics on growth in SE Asia?
There is no empirical evidence as to why Confucian ethics was important to south East Asian growth instead, good government policies was the most important piece rather than cultural philosophy. There is no correlation between democracy and economic growth in the East Asian growth story
How did the annual rate of GDP growth in Indonesia change in 1998?
Indonesia shrank by over 15%
When does a speculative attack occur?
When foreign exchange markets doubt the resolve and or the ability of a central bank to defend the announced fixed exchange rate
What can a central bank do to fight a speculative attack?
Increase interest rates and sell foreign reserves
What is the consequence of fighting a speculative attack?
Lots of domestic pain from high interest rates and the Central Bank runs out of foreign reserves
What are the two different perspectives of the causes of the AFC?
- Krugman: Economic imbalances and structural weaknesses from market failures and cronyism (Not taken as seriously)
- Sachs: Rapid international capital market liberalisation that led to a self-fulfilling currency crisis. Structural weaknesses alone did not warrant crisis
What did the current accounts of East Asia look like before the crisis?
They all ran stable deficits (other than Thailand’s which was too large)
What were some internal precursors to the crisis?
- East Asian Banks had large overseas borrowings denoted in US dollars
- Local companies had invested in speculative ventures (real estate)
- Currency mismatch (short-term borrowing in USD but long-term investment domestic investment) fuelled by being able to roll over the debt, fell when no longer could roll over the debt
- Moral hazard with government
- Insufficient foreign reserves
What were some external precursors to the crisis?
- Low US interest rates resulted in large short-term capital flows to East Asia (appreciation) making exports less competitive
- Capital and financial market liberalisation left countries exposed
- US interest rate rises led to concerns about the ability to maintain the peg
- Pressure to defend exchange rates
If investors expect domestic currency to depreciate, what will happen to interest rates under UIP?
If investors expect currency to depreciate, this means the domestic interest rate must be higher otherwise the exchange rate will become unstable, this is where depreciation is expected
What does the Uncovered Interest Parity condition say?
In equilibrium, return on domestic and expected return on foreign assets at time t should be equal
If the interest rate in a foreign country is higher than in the domestic country, what is expected to happen to the relative value of domestic currency?
Domestic currency is expected to appreciate to offset any potential gains elsewhere as shown by the UIP condition
How can a currency crisis be self-fulfilling?
Speculative attacks are based on the premise that the government cannot sustain the exchange rate and therefore dump currency. However whether this is true or not, them dumping currency makes the crisis self-fulfilling.
What happened in Korea under Kim Young Sam?
They abandoned the policy of picking winners and prioritising industries and created the economic environment for over-investment in heavy industry and banking. It joined the OECD enacting neoliberal policies quickly
