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Asian Currency Crisis

3. Regarding the Asian currency crisis, answer the following questions:
a. Describe the normal reasons why a currency undergoes a significant depreciation and what were the important characteristics of the Asian countries involved in the crisis?

b. What are some expected domestic economic consequences of the currency crisis for the countries involved? Focus on:
o import prices of goods and services into the Asian country.
o export prices of goods and services from the Asian country.
o Domestic inflation rates.

c. Assume that the countries involved undertake a tight monetary policy and raise interest rates in response to the crisis. What are the two primary reasons for raising interest rates in their case?

d. Given high domestic interest rates, what is the economic outlook for these Asian countries in the next few years?

Solution Preview

a. Exchange rates are primarily determined by investors' expectations regarding future 'real' returns on foreign investments. When investors anticipate higher returns on their investments in the US, for example, they will swap their foreign currencies for dollars. This causes an increased demand for the dollar, which increases its value relative to other currencies. In the late 80s and early 90s, Asia experienced high growth rates, which attracted foreign investment to the degree that a financial bubble was ...

Solution Summary

Currency, international trade, and monetary policy are discussed.

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