ASIAN FINANCIAL CRISIS OF 1997-1998: A TALE OF TWO COUNTRIES

The purpose of this paper is to explain not only why Asian Financial Crisis of 1997-1998 occurred, but also why some countries suffer a lot from speculative attacks, while other countries survived relatively unscratched throughout the crisis. For example, South Korea and Indonesia were engulfed by the crisis while Taiwan and Singapore fared better. After tracing major factors contributing to the Asian currency crisis and establishing stylized facts about underlying causes, we focus on South Korea and Taiwan to contrast different results from speculative attacks on their currencies. In order to find out why these two countries had different effects of the crisis, we examine macro-fundamental variables of South Korea and Taiwan and identify some potential causes of the crisis by using Engle and Granger causality test and co-integration analysis. Our findings show that there exists a unidirectional causality from international finance variables to the currency value for South Korea, but no causality between them for Taiwan.