Latin America and East Asia in the context of an insurance model of currency crises

Article Abstract:

The 1995 Latin American crisis and the 1997 East Asian crisis were examined through an insurance model of financial crises. The insurance model contains a policy conflict in which a credit-constrained government wants to keep its reserve assets as an instrument of self-insurance while guaranteeing the financial liabilities of its citizens. The major factors in this model are the ratio of bank reserves to bank loans, the capability of the private sector to appropriate government assets and the level of appropriation determined by capital flight. It was concluded that the insurance model is consonant with these variables as seen in the Asian and Latin American crises.

Models, Latin America, Government insurance

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International stock return differentials and real exchange rate changes

Article Abstract:

A negative relationship exists between international stock return differentials relative to the US and real exchange rates deviations from Purchasing Power Parity (PPP). A model on stock market indices of four major members of Organization for Economic Cooperation and Development (OECD) relative to the US showed that stock markets of nations where the currency appreciates in real terms against the dollar were able to outperform the US stock market. The relative price of domestic goods and equities is also found to increase due to real appreciations.

Exchange Rates, Research, Foreign exchange

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Moral hazard, asset price bubbles, capital flows, and the East Asian crisis: the first tests

Article Abstract:

A theory that the East Asian financial crisis was caused by capital inflows which were the consequence of a moral hazard problem in financial intermediation, is examined. Evidence of asset price bubbles in East Asian stock markets in the period prior to the crisis and the reversibility of inflows was determined since this was the basis of the moral hazard concept. It was concluded that there is a basis for the moral hazard argument because of the incidence of capital inflow reversals in the Asian crisis.

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