How Were Capital Inflows Stimulated under the Dollar Peg System?
How Were Capital Inflows Stimulated under the Dollar Peg System?
This chapter focuses on external factors as the cause of currency and financial crises. It analyzes how the de facto dollar peg system adversely influenced capital inflows to the countries in crisis by studying the relationship between the de facto dollar peg system and the capital inflows to these countries. Focus is placed on countries that requested IMF financial support during the Asian crisis, namely, Thailand, Korea, and Indonesia. Estimated regression equations are used to conduct a simulation analysis of how capital inflows would have behaved had the monetary authorities of these countries adopted a currency basket peg system instead of the de facto dollar peg system. The simulation analysis generates the following results: A currency basket peg system would have had a depressing effect on capital inflows to Thailand and Korea during the analyzed period 1985–96. It would also have had a slightly depressing effect on capital inflows to Indonesia. Increases in foreign exchange risk against the U.S. dollar under a currency basket peg system would have contributed most to the depressing effect. This is because the estimated foreign exchange risk variable against the U.S. dollar is the most significant variable among the explanatory variables in the capital flow equation. Two commentaries are included at the end of the chapter.
Keywords: Asian financial crises, currency crisis, capital inflows, Thailand, Korea, Indonesia, monetary policy, currency basket peg system, foreign exchange
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