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References

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1

The author thanks David F. Hendry and V. Santiprabhob for useful discussion in the early stages of this research. He is also grateful to Ritu Basu, Wim Fonteyne, Alfredo Leone, Stephen Schwartz and other colleagues in the IMF for their suggestions and comments and to Natalie Baumer for editorial assistance. All errors are the author’s responsibility. The views expressed are also his and do not necessarily represent those of the Fund.

2

The term “financial crisis,” refers to simultaneous occurrence of banking and currency crises in this paper.

4

Sicat (1998) argues that the development in financial regulations and liberalization in the early 1990s was one reason why the Philippines was relatively less affected by contagion. In addition, the Philippines was probably less affected by non-economic factors. For example, political issues related to the credibility of the Suharto regime, are seen as important factors in understanding the financial crisis in Indonesia.

5

International Monetary Fund (1998b), for example, summarizes how the crises evolved.

6

During this time period, Thailand implemented several measures including interest rate liberalization and the establishment of the Bangkok International Banking Facility.

7

Recent literature, which emphasizes weak banking and financial sectors as one factor in currency crises, includes McKinnon and Pill (1996), Chan-Lau and Chen (1998), Chang and Velasco (1998), Krugman (1998), and Marshall (1998).

8

To this end, the Asian crisis differs from the Mexican case, since the private sector seems to be the cause rather than the public sector (World Bank 1998).

9

See Flood and Marion (1999) for a survey on recent theoretical currency crisis literature.

10

Furthermore, Goldstein (1998) centers his arguments on a change in expectations and in the assessment of investors about economic conditions. He also introduces a “wake-up call” hypothesis—for instance, the Thai crisis became a wake-up call for investors to re-assess the credibility of other Asian countries whose economies were believed to be sound, but in fact were weak.

11

To this end, this study focuses on “pure” contagion as defined by Masson (1998) which occurs because of factors which cannot be explained by macroeconomic fundamentals and which often involves self-fulfilling factors and multiple equilibria.

12

Campbell and Shiller (1987) discuss issues of causality in the context of the present value model, and the causality relationship establishes when the stock price is not an exact linear function of current and past exchange rates.

13

See, for instance, Hamilton (1994) for details of the Engle-Granger and the Augmented Dicky-Fuller tests, which are frequently used by researchers. Granger et al (1998) use similar types of tests.

14

Another possible source of the failure to establish cointegration in this time-series may be the assumption of a constant return on the financial assets in equation (3).

15

The top three imports in Thailand are non-electrical machinery and parts, electrical machinery and parts, and chemicals, the top three exports are computers and parts, garments, and rubber. For the Philippines, the main imports include telecommunications equipment and electrical machinery, materials and accessories for the manufacture of electrical equipment, and semi-processed manufactured goods. The main exports are electrical and electronic equipment and components, and garments.

16

The growth level in the food sector dropped from 9.4 percent in 1994 to 5.8 percent in 1996. This growth rate in 1996 is the lowest among all sectors.

17

In 1996, the Philippine exports to ASEAN accounted for 14.4 percent of the total, while its imports from ASEAN accounted for 12.3 percent.

18

See Saunders (1999) for discussion of the importance of considering the off-balance sheet items in evaluating a financial portfolio.

Currency Crisis and Contagion: Evidence From Exchange Rates and Sectoral Stock Indices of the Philippines and Thailand
Author: Mr. Jun Nagayasu