Foreign Exchange Market Contagion in the Asian Crisis: A Regression-Based Approach

This paper investigates whether, during the Asian crisis, contagion occurred from Thailand to the other crisis countries through the foreign exchange market, and, if so, determines the contribution of this contagion to the crisis. More specifically, we examine whether the effect of the exchange market pressure (EMP) of Thailand, the origin of the crisis, on the EMP of four Asian crisis countries increased during the crisis. Instead of measuring contagion by the commonly used correlation coefficients, we apply regression analysis. To control for the impact of macroeconomic fundamentals, we construct a time-varying indicator measuring the fragility of each economy. Additionally, we control for spillovers and common external shocks. We find evidence of contagion from Thailand to Indonesia and Malaysia, with 13 and 21 percent of the pressure on the respective currencies attributable to that contagion. For Korea and the Philippines there is no evidence of contagion from Thailand. JEL no. F30, F31, G15