ERI Discussion Paper Series No.92
A Prototype of Macro-econometric Models For Analyzing Asian Crises

March 2000
Kanemi Ban
(Economic Planning Agency; Osaka University)
Kiyomi Watanabe
(Economic Planning Agency)
Mantaro Matsuya
(Economic Planning Agency)
Yasuko Ikemoto
(Economic Planning Agency)
Masakatsu Nakamura
(Economic Planning Agency)
Takeshi Ihara
(Economic Planning Agency)
Masumi Kawade
(Economic Planning Agency; Tokyo University)
Tomonari Takeda
(Economic Planning Agency; Tsukuba University)


During the 1980's, East Asian countries recorded surprising economic growth attributed to investment in export-oriented industries and promotion of industrialization. High domestic saving rates and Foreign Direct Investments (FDI) supported their investments. Led by high exports and investments, these countries achieved real growth rates around 10% by 1995. Though current accounts were running deficits, low inflation and balanced budgets created an image and subsequent expectations of "Growth Center of the World".

By pegging exchange rates and keeping interest rates higher than developed countries, foreign money flooded into Asia with the liberalization of financial systems. This was especially evident in 1994, after the currency crisis in Mexico, when capital inflow increased rapidly.

However, in 1996, considerations were made in Thailand to cut down its currency because export growth, a leading component of GDP, had slowed down. In spite of an effort to sustain speculation of the baht, Thailand moved to float after the currency attack in May 1997. As a result, amounts of capital outflow, combined with a weak financial sector, paralyzed Thailand economy. GDP continued to decline in 1997 and 1998. At this point, the currency crisis had spread to Malaysia, Indonesia, and Korea.

Notwithstanding, the Japan economy, too, has fallen victim to this Asian crisis. Immediately after the baht started to float, concerns surrounding the strength of the Japanese financial sector began heightening in overseas markets. Fears of such instabilities became an obstacle for Japanese financial institutions trying to raise funds in foreign currency. The Japan premium, that is, the interest rate premium Japanese financial institutions pay over interest rates fir raising funds in U.S. dollars, started to increase in October and rise sharply in November 1997. As a result of the difficulty in financing in overseas markets, large Japanese banks and securities firms such as Hokkaido Takushoku Bank and Yamaichi Securities went bankrupt.

We can consider this financial crisis to have been caused by anxiety about expansion of foreign debts, inflation, and the collapse of asset prices under currency depreciation. Asian countries and their closely interdependent economies in term of both trade and FDI, brought about such a chain reaction that worries involving expectations of economic growth for one country led other counties to stagnation.

There have been many simulation experiments for Asian crises. Some of them gave us valuable insights, while others failed to explain the observed phenomena. It is well known that a traditional backward-looking model is not useful for analyzing the causes and impacts of financial crises. We need a forward-looking model for accuracy purposes. Unfortunately, there are few macro-econometric models used in Japan, in which forward-looking expectation mechanisms are introduced explicitly. In this paper, we present a small forward-looking model for Japan, Thailand and Korea, which proves to be significant for explaining Asian crises. Some simulation experiments were undertaken to think about Asian crises.

Structure of the whole text(PDF-Format 3file)

  1. full text別ウィンドウで開きます。(PDF-Format 364 KB)
  2. page1
    1. Introduction
  3. page2
    2. Historical Perspective
  4. page9
    3. The Basic Model
  5. page15
    4. Preliminary Simulations
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