Question

9) In considering the depreciation of the Asian currencies during the Asian crisis (1997: and the depreciations were severe and came very rapidly) due to trade flows or capital flows? Why do think the degree of movement over a short period may depend on whether the reason is trade flows or capital flows?

Answer 1

During the trade crisis of 1997 the Asian countries saw high capital outflows as firms had no confidence in the Asian currencies and the capital outflows saw further sell of the Asian currencies and investors bought foreign currencies. This led to devaluation in the currency.

Degree of movement over a short period depends on capital flows. Trade flows have very little impact in the short term as the deficit accumulates over years and the currency takes time to depreciate. Hence the effect is minimum at least in the short term.