The Monetary Policies of the Asian Financial Crisis and its Ramifications
At the end of the 1980s and early 1990s, the economies of Southeast Asia developed rapidly. Thailand, Malaysia, Indonesia, Singapore and Korea experienced an average annual GDP growth of 12%, which was called “the Asian miracle”. Among them, Thailand experienced approximately 15% GDP growth, and Malaysia experienced almost 20% GDP growth. But this momentum of economic growth did not last long. This rapid development not only brought huge economic profits, but also exposed the weaknesses and problems which overheated their economic development. These problems did not get much attention and got worse. In this case, the financial crisis broke out in 1997. This crisis was first seen in the currency depreciation and stock market. Starting in Thailand, the Thai baht devalued swiftly and lost more than half of its value and the Thai stock market also dropped 75%. As a consequence, many banks and companies had to declare bankruptcy. Due to the economic globalization, following Thailand, almost all of the Asian countries were plunged into severe economic difficulties. The crisis forced most Asian currencies to depreciate precipitously in a short period, and their currencies’ exchange rate against the dollar dropped between 10% to 70%. The change in foreign exchange market also affected the Asian stock market, and caused stock prices to slump by more than 30%. Besides, combined with the severe inflation and withdrawals from foreign investors, the speed of the Asian overall economic growth slowed down. The speed of economic growth in Thailand, Indonesia, Malaysia and Philippine declined to 3% after 1997, and for Korea, there was a negative economic growth. In this crisis, Thailand is one of the most typical countries that gave up its fixed exchange rate regime and lost heavily. But there was also a country, Hong Kong, who stuck to its fixed exchange rate regime and succeeded in overcoming the currency depreciation and stock market shock. I believe that sticking to the fixed exchange rate regime is one of the most important factors to overcome the crisis, and the different outcomes in Thailand and Hong Kong was due to their different monetary policies on the exchange rate regime. Therefore, this paper will mainly analyze the monetary policies used to guard their fixed exchange rate regime in Thailand and Hong Kong and decipher the role they played during the Asian financial crisis. Thailand implemented monetary policies such as financial market liberalization, borrowing large number of foreign debt, which led to giving up the fixed exchange rate and suffered great losses. However, in Hong Kong, monetary policies such as raising the inter bank offered rate and intervening in the country’s currency and stock market by the government helped it to peg the fixed exchange rate regime, lessen the effects of the shock, and reduced the damage from the crisis. What caused the Asian Financial Crisis?
The first reason that caused the financial crisis was the overdraft of high economic growth. After experiencing the boom in economic development, maintaining high rates of economic growth was the goal of most countries. But, when the capital and resources of high growth cannot meet the needs of economic development, some Southeast Asian countries turned to borrowing a large number of foreign debts in order to keep the economic growth pace. Over time, the heavy borrowings led to the persistent and sizeable current account deficit. And on the other side, the increased mobility of capital, called “hot money”, in Asian countries increased the probability of the domestic economy being attacked from external factors, which might have immeasurable effects on economic and financial stability. Investment rates and capital inflows in Asia remaining high is another reason. In part, this occurred because the interest rate fell in industrial countries and lowered the...
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