An analysis of the Asian crisis by a capital-linked multicountry model

Abstract

Where the causes of the Asian financial crises are concerned, we believe that a structural accumulation of trade deficits is a more fundamental cause than a failure of financial controls. Among Asian countries that are targets of international arbitrage, chronic trade deficits have led to a shortage of foreign currency reserves, making it impossible for such countries to prop up their own currency through buying. Thus, forecasting future movements in these structural trade deficits has relevance to forecasting the course of the currently depressed exchange rates. Predicted results produced by the "Kyoto University Pacific Rim Economic Model" maintained by the authors reveal an overall stabilization and moderate improvement in the real exchange rates of 10 Asia Pacific countries. Using the same model, we investigated the effect of capital flight on individual Asian countries, based on a theory that a rise in productivity in the U.S. attracts capital, which has a negative effect on several other countries. Results indicated that the ASEAN country crises will not continue in the long run, and that the crisis in South Korea should be seen as the origin of an overall decline in the rate of growth.