DP4642 | External Currency Pricing and the East Asian Crisis

Publication Date

23/09/2004

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Abstract

This Paper provides a quantitative investigation of the East Asian crisis of 1997-99. There are two essential features of the crisis that we focus on. These are: a) the crisis was a regional phenomenon; the depth and severity of the crisis was exacerbated by a large decline in regional demand; and b) the practice of setting export goods prices in dollars (which we document empirically) led to a powerful internal propagation effect of the crisis within the region, contributing greatly to the decline in regional trade flows. We construct a multicountry macroeconomic model with these two features, and show that it can do a reasonable job of accounting for the response of the main macroeconomic aggregates in Korea, Malaysia, and Thailand during the crisis. Without the regional dimension and dollar pricing of exports, the model fails to account for the depth and severity of the crisis.