The Thai Currency Crisis: Fracture in a Fixed Exchange Rate Regime

Hartogh, Matthew (2007): The Thai Currency Crisis: Fracture in a Fixed Exchange Rate Regime.

Abstract

Abstract

If the financial press had been paying attention to some crucial barometers of currency instability in Thailand last year, the ensuing crisis in Asia would perhaps not have been so much of a surprise. On July 2,1997, the Thai government allowed the Baht to float against the Dollar for the first time in a decade. As we all now know, this effective devaluation set of a train of events which would shock all of the Asian economies which had hitherto enjoyed unqualified growth and prosperity for the last several years.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange Rates Currency Baht
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems

References

References:

Annual Report 1997, International Monetary Fund, Washington D.C., p. 91.

More precisely, to a basket of currencies heavily weighted with the dollar.

The monetary base of a country is effectively equal to the liabilities on the balance sheet of the central bank. This monetary base, MB in the diagram, is multiplied through credit creation to equal the actual money supply in circulation. When funds flow into the country from abroad, (as in diagram [1.1]), the real money supply MB1/P must expand to (MB1 + FA)/P. These foreign assets FA, show up in the asset side of the central bank balance sheet (see T diagram). In order to keep the liability side at a constant MB, the central bank must sterilize the inflow of foreign assets with a sale of domestic assets (i.e., Baht denominated bonds).

Another way to say this is to state that the Thai CB needed to soak up excess money in the economy by the open market sale of Thai government bonds.

Global Development Finance 1998, Country Tables p. 532, (Washington: The World Bank)

Most of this debt was in the hands of Japanese creditors (see table 2 – foreign currency denominations of debt).

Global Development Finance, ibid.

Global Development Finance 1998, op. cit., p.532

www.imf.org

www.imf.org