The Dynamics of Fundamentals in Currency Crisis in Indonesia and Malaysia

• Main Author: Lim, Guan Choo
• Format: Article
• Language: English
• Published: Penerbit UTM Press 2006
• Subjects: HB Economic Theory
• Online Access: http://eprints.utm.my/id/eprint/4261/1/Bab_5.pdf; http://eprints.utm.my/id/eprint/4261/
• Institution: Universiti Teknologi Malaysia

The impact of selected macroeconomic fundamentals on the market pressure (MP) is assessed using the third generation models based on ‘Dusenberry’ adaptive expectations. The findings are consistent with the general belief that weak macroeconomic fundamentals had triggered the speculative attacks against the Asian currencies. However, the macroeconomic variables and their dynamics that set the groundwork for a currency crisis differ considerably in Malaysia and Indonesia. A speculative attack against the Rupiah occurred in a generalized state of macroeconomic weakness while domestic credit growth, the fiscal balances-GDP ratio and the real exchange rate exerted strong influence on the exchange market pressure for Malaysia. In conclusion, while there are some common fundamentals matter for shifting market expectations and hence, market pressure in both countries, the dynamics that formed market expectations are divergent. Therefore, the belief that the Asian economies had the same characteristics that triggered the currency crisis in 1997 may be incorrect.