The East-Asian Financial Crisis and a Comparative Analysis of the East African Economies

Abstract

This study empirically tests the theory that pegged exchange rate regimes significantly contributed to the East Asian Financial crisis. Granger causality effect is tested in relationships between exchange rates, differential interest rates and the balance of payments components from 1981 to 1999 using ECM, VAR and ADL models. The results confirm that pegged exchange rate regimes in a near perfect capital mobility economy are incapable of controlling massive foreign cunency flows depleting international reserves. Also, monetary policies implemented under pegged exchange rate regimes in Indonesia, Thailand and Korea maintained high investment returns at the expense of the external balance. The disparities between results of real and nominal variables provide an insight in identifying periods of financial distress prior to a crisis. A comparative analysis is undertaken to determine warning signs of crises in the East African region by comparing its macroeconomic activities to those of the East Asian region. The Chow's test for structural breaks reveal significant differences and similarities but does not identify any warning signs of future crises similar to the East Asian Financial Crisis.