Essays on exchange rate dynamics and currency crises in Asia

Abstract

This dissertation studies theoretical models of causes of and arguments about remedies for currency crises, and empirically examines movements in exchange rates and episodes of crises. In the first chapter, various theoretical models of currency crises are evaluated and issues in capital account convertibility are discussed. The second chapter analyzes the currency crisis in Indonesia to determine if domestic fundamentals, monsoons or contagion caused the 1997 crisis. Using Markov-switching models, this chapter finds that including exchange pressure from neighboring countries in the transitional probabilities improves the conditional probability of a crisis in Indonesia. In the third chapter, the dynamics of Indonesia's exchange rate are examined using different theoretical and empirical models. In particular, in-sample and out-of-sample forecasts are shown for VAR, cointegration, and unobserved components models. The last chapter is a case study that investigates India's 1991 currency crisis. The chapter constructs an estimate of the equilibrium real exchange rate to determine if it was overvalued at the time of the crisis and also looks at short run factors that may have contributed to misalignment.