Contagion, Monsoons, and Domestic Turmoil in Indonesia's Currency Crisis

9 Pages Posted: 31 Dec 2002

See all articles by Valerie Cerra

Valerie Cerra

International Monetary Fund (IMF)

Sweta C. Saxena

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

Abstract

The 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 pressure 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 of 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. The paper also finds evidence of contagion in the stock market.

Suggested Citation

Cerra, Valerie and Saxena, Sweta Chaman, Contagion, Monsoons, and Domestic Turmoil in Indonesia's Currency Crisis. Available at SSRN: https://ssrn.com/abstract=309450

Valerie Cerra (Contact Author)

International Monetary Fund (IMF) ( email )

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

Sweta Chaman Saxena

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

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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