Contagion, Monsoons, and Domestic Turmoil in Indonesia: A Case Study in the Asian Currency Crisis
March 1, 2000
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Summary
This paper investigates whether Indonesia’s recent currency crisis was due to domestic fundamentals, common external shocks (“monsoons”), or contagion from neighboring countries. Markov-switching models attribute speculative pressure on Indonesia’s currency to domestic political and financial factors and contagion from speculative pressures in Thailand and Korea. In particular, the results from a time-varying transition probability Markov-switching model (which overcomes some drawbacks of previous methods) show that inclusion of exchange rate pressures from Thailand and Korea in the transition probabilities improves the conditional probabilities of crisis in Indonesia. There is also evidence of contagion in the stock market.
Subject: Econometric analysis, Exchange rates, Financial markets, Foreign exchange, Markov-switching models, Probit models, Real effective exchange rates, Stock markets
Keywords: Asia and Pacific, confidence index, Contagion, crisis in Indonesia, crisis state, Currency crisis, East Asia, exchange rate crisis, exchange rate pressure, Exchange rates, forecasted values, Global, Indonesia, Indonesia's MPI, Markov-switching models, MPIS from Thailand, MSM result, overvalued exchange rate, pressure in Thailand, Probit models, Real effective exchange rates, South Asia, Stock markets, transition probability, WP
Pages:
26
Volume:
2000
DOI:
Issue:
060
Series:
Working Paper No. 2000/060
Stock No:
WPIEA0602000
ISBN:
9781451848045
ISSN:
1018-5941
