Currency crises, financial liberalisation and monetary integration in emerging markets: an application to East Asia

Doctor of Philosophy. Department of EconomicsThis thesis contains three main chapters that examine issues raised in the aftermath of the Asian crisis of 1997-98, concerning the stability and sustainability of exchange rate regimes in emerging markets, in a framework of financial liberalisation and a context of uncertainty. Chapter 2 uses a macrodynamic model to describe the build-up, actual eruption and main consequences of the Asian crisis. With uncertainty about the timing of monetary policy reversal, the model predicts that money expansion leads to output increase, current-account deterioration and excess-capacity. The concomitant policy dilemma between long-run sustainability and short-term prosperity, if not corrected, might induce an exchange rate collapse. Chapter 3 investigates the optimal timing of financial liberalisation in emerging markets in a framework where policymakers choose an exchange rate target aimed at minimising price volatility and the risk of a debt crisis. With accumulated net capital inflows stochastic and exhibiting differentiated structural behaviour before and after liberalisation, the model derives an optimal rule for the timing of financialliberalisation, that depends non-negligibly, on theuncertainty regarding capital movements. Chapter 4 assesses empirically the economic feasibility ofmonetary integration in East Asia. The Blanchard md Quah (189) technique is employed to identify three structural shocks pertaining to the countries in the data-panei. The analysis of the characteristics and co-properties of the identified shocks suggests that there might be a case for monetary integration in East Asia.N/