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Lecture 57

ECON 102 Lecture Notes - Lecture 57: 1997 Asian Financial Crisis, Thai Baht, Shortage


Department
Economics
Course Code
ECON 102
Professor
Robert Gateman
Lecture
57

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Econ 102 Lecture 57
1. Asia Financial Crisis of 1997
a. In 1997, Thailand had a fixed exchange rate with US
b. Thai ev was too high
c. Continuous excess demand for USD
d. Siam Central Bank depletes its OR of USD to support
baht
e. SCB runs out of USD
f. Ev of baht plummets
g. Starts of Asian Financial crisis -domino effect
h. Eventually, Thailand had to devalue
2. 2015 US Trade deficit and the Undervalued CN Yuan (CNY)?
1. CN fixes its CNY ev too low? (e too high) with the USD
i. Purpose is to stimulate CN economic growth
ii. Creates BOT surplus for CN, but BOT deficit for
US
iii. PBOC must sell CNY (buy USD or T-bills) to keep
ev of CNY low and e of USD high
iv. PBOC ends up holding trillions of USD as OR rise
v. The new CNYs used to buy foreign financial assets
eventually return to CN to purchase exports (CN’s
M supply increases)
vi. Cost #1: PBOC’s printing of CNY to fix low ev is
potentially inflationary
this inflation erodes NX as much as an
appreciation of the CNY
2. CN loans these USD ORs to US
vii. CN loans the US these USD by purchasing US
T-bills, at low rates
viii. This borrowing by US creates a K-Account surplus
that “finances” their C-account deficit
3. Sterilization = neutralize the M effects used to fix ev
= actions by CB to keep M supply constant despite
“defending” ev and preventing CNY appreciation
= attempting to prevent monetary expansion
1. CN eventually flooded with these new CNYs
2. PBOC sells domestic bonds; “soaks up”
excess CNYs
This switching of domestic CNY to bonds
does not affect the external value (sponge)
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