Contagion, Monsoons and Domestic Turmoil in Indonesia: A Case Study in the Asian Currency Crisis

27 Pages Posted: 20 Feb 2004

See all articles by Valerie Cerra

Valerie Cerra

International Monetary Fund (IMF)

Sweta C. Saxena

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: March 2000

Abstract

This paper investigates whether Indonesia's recent currency crisis was due to domestic fundamentals, common external shocks (monsoons), or contagion from neighboring countries. Markov-switching models attribute speculative pressures on Indonesia's currency to domestic political and financial factors and contagion from speculative pressures in Thailand and Korea. In particular, the results from a time-varying transition probability Markov-switching model (which overcomes some drawbacks from previous methods) show that inclusion of exchange rate pressures from Thailand and Korea in the transition probabilities improves the conditional probabilities of crisis in Indonesia. There is also evidence of contagion in the stock market.

Keywords: Currency crisis, Indonesia, contagion, Markov-switching models

JEL Classification: F39, F41, F42, F49, C32, G15

Suggested Citation

Cerra, Valerie and Saxena, Sweta Chaman, Contagion, Monsoons and Domestic Turmoil in Indonesia: A Case Study in the Asian Currency Crisis (March 2000). IMF Working Paper No. 00/60, Available at SSRN: https://ssrn.com/abstract=504742 or http://dx.doi.org/10.2139/ssrn.504742

Valerie Cerra

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8596 (Phone)

Sweta Chaman Saxena (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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