The Asian Financial Crisis and international reserve accumulation: A robust control approach

Abstract

Standard macroeconomic models have difficulties accounting for the surge in international reserves of Asian countries in the aftermath of the Asian Financial Crisis of 1997. We propose precautionary demand for saving generated by model uncertainty as an important driver of this phenomenon. Using Korean data, we estimate a simple permanent income model augmented with model uncertainty, find a structural break at the point of the Asian Financial Crisis, and identify a rise in concern for model misspecification which is distinct from an increase in income volatility. The post-crisis concern for model misspecification implies a reasonable detection error probability. We also show that learning serves as an additional powerful amplification mechanism in our framework.

Improving Early Warning System Indicators for Crisis Manifestations in the Russian Economy

“…It should be noted that the above methodological approaches to the crisis early warning were mainly based on the financial market indicators as precursors to the economic imbalance and they were assessed by determining the quantitative values of their critical levels [2,4,[19][20][21][22][23]. However, as already noted in the study, countries differ in the level of economic development; this difference determines the differentiation of active indicators of the economy at different stages of its development and the typical historical and current peculiarities of its operation.…”

“…The scientists distinguish the following factors: the imbalance (increase/decrease) in bank loans (similar to the Latin American crisis of 1980 and Mexican in 1994); mortgage credits (crisis in Japan in the 1980s, in the USA in 2000-2001 and in the USA in 2007-2009) [20]; imbalance in savings (crisis in the USA in 1931 and in East Asia in 2000) [19,20]; currency devaluation (crisis in Asia in 1997-1998). In addition, the authors highlighted the following causes of economic crises: a decrease in government bond yields, a state budget deficit [19]; an increase in interest rates, fall of stock, credit rating downgrade [20]; a decrease in foreign-exchange and gold reserves, an outflow of international investment [2,21,23]; an external debt increase [20]; a change in the money supply and its aggregates, as well as a monetary base; an increase in ratio of non-performing loans and bad loans [2,4] change in the amount of debt support payments and estimate of the obligatory repayment of the loan principal comparing to incomes [21]; changes in the ratio of loans to households and non-financial organizations comparing to the deposits and settlement accounts of the population and non-financial organizations [20], decrease in investment and innovation activity [48,51]. For Russia, the Federal Budget revenues for 2019 were formed at the expense of oil and gas revenues by 39.25% [57], which indicates a significant dependence of the economy on the oil and gas sector.…”

“…Currently, the process of forming complex systems for monitoring the financial market and early detection of crisis phenomena is just beginning. But it should be noted that as a result of the 1997-1999 Asian financial crisis and its chain reaction of spreading crisis phenomena to the economies of other countries, most economists singled out primarily the financial market indicators as an early warning system [2,4,[19][20][21][22][23]. As a rule, these are the level of international reserves [2,21,23], quotation of securities [20], national currency devaluation [21], the state budget balance [19], the level of public debt [19] and so forth.…”

“…But it should be noted that as a result of the 1997-1999 Asian financial crisis and its chain reaction of spreading crisis phenomena to the economies of other countries, most economists singled out primarily the financial market indicators as an early warning system [2,4,[19][20][21][22][23]. As a rule, these are the level of international reserves [2,21,23], quotation of securities [20], national currency devaluation [21], the state budget balance [19], the level of public debt [19] and so forth. The main problem of this methodology is to delimit and justify the boundaries and conditions that determine the critical value of the oscillators.…”

“…The main problem of this methodology is to delimit and justify the boundaries and conditions that determine the critical value of the oscillators. Most publications were devoted to the definition of indicators and critical values for advanced economies [4,22] or Asian countries [23,24]; the greater part of which are characterized by the vulnerability of the financial and corporate sectors [23,24], low level of international reserves and liquidity [23], low international positions of countries [24] and so forth. Such differentiation of countries significantly complicates the development of a unified and universal system of early warning indicators for all types of crises and countries with different levels of economic development.…”