macro exam tomorrow!

so i'll be wasting time the night before of course

WRONG! HAH! in your face, prejudiced FOOLS! :D
I am here to explain a topic as a way of studying.
Here I go!

NB: No time for diagrams/graphs. Suck it up, use your imaginations.

The Asian Financial Crisis

It involves 4 countries (ASEAN-4) during the early 90s: The Phillipines, Indonesia, Malaysia, and Thailand. And they have a few characteristics that caused this crisis:

1. Strong economic growth (i.e. growing gdp)
2. A fixed exchange rate
3. And a Balance of Payments (BOP) surplus, despite a Current Account (CA) DEFICIT

In other words, you had all these countries with booming economies AND a fixed exchange rate, so foreign investments (nearly typed infestments) flooded in.

So that's where we begin. NB: It is going to be analysed from the point of view of the Thailand Baht (THB).

Aggregate Demand (AD) is going nuts cause of increased Investment Demand (ID), so you have a price (P) and output (Y) increase.

So, with prices up in Thailand, their exports (EX) become more expensive, so they will export less, meaning that the demand for THB (D_THB) will have decreased. Meanwhile, imports (IM) are relatively cheaper to the Thais, so they will import more, meaning that the supply of THB (S_THB) will have increased.

What you have there is an excess supply of THB and hence, a shortage of foreign exchange (FX), which is where the CA DEFICIT is apparent. (CA = EX - IM + NIP[net income payable isn't very important, don't worry about it])

However, there is a BOP surplus!! What the?! Apparently Thailand's Net Capital Inflow (NCI) is enough to cover the CA deficit and then some. How does that happen?

As P and Y have increased, Real Money Supplied (MS/P) decreases due to the denominator there increasing. And Real Money Demanded (MD/P) increases because you need more money to buy things and furthermore, your output has increased, so you're consuming more. And these two changes (regarding MS/P and MD/P) lead to higher interest rates (r).

Now you have:

1. High r
2. Strong eco growth
3. and the fixed XR, which means that there is no risk of currency depreciation

SO, huuuuuuge amounts of foreign investment flows in. I'm talking massive amounts of NCI. (Enough to cover the CA deficit.)

Leading to big increases in D_THB (D_THB = EX + NCI), and a shift of D_THB to the right, far enough to induce a BOP surplus.

Now, the economy has a shortage of THB and a surplus of FX,  so, in order to stop the exchange rate from appreciating (cause they fixed the thing),  the reserve bank up in Thailand sells THB into the economy and buys FX from the economy, thereby increasing their foreign exchange reserves (FXR), increasing their money base (M0), increasing their money supply (MS), decreasing r, which results in a series of auto-adjustments:

With lower r, investments increase, AD increases, P increases, EX decreases, D_THB decreases and shifts left. Also, with lower r, NCI decreases, shifting D_THB left too. (Team effort by EX and NCI.)

So with higher P and Y, IM will increase leading to S_THB increasing, and tada: we have a BOP balance again.

Oh wait, this is a crisis isn't it. There's gotta be more.

With lower interest rates, the price of bonds and shares increase, investors are happy, they consume more, aggregate demand shifts up further, inducing higher P and Y.

And with further increased P, EX decreases due to less competitive prices, and so D_THB decreases and shifts left. Meanwhile, IM are more attractive as opposed to domestic goods, and S_THB increases and shifts right. This is not good for Thailand.

The CA deficits worsens, and their old buddy NCI can't get them out of it now.

By the mid 90s, everybody is thinking, "Can they really keep this up? I'm worried about it all crashing and my money will be gone :'( "

So while Thailand has this HUGE CA deficit, everybody panics and pulls their money out of Thailand. OH NOEZ!!

NCI disappears like the ninja that it was and D_THB decreases masssssivellyyyyyyyy ai yah gg thailand

So in an intriguing plot twist: Mr. C.A. Deficit turns into Mr. B.O-P Deficit. Ohmaigarh~

Thailand is all like, "Bail!!!!!" and they choose to un-fix their exchange rate, and it is allowed to fully depreciate into the fiery depths of hell.

The lessons learned here:

Thailand relied too heavily on foreign investments, so when these disappeared, there was big big trouble. gg rax down. 

And there was another lesson, but I can't remember!

*clicks publish post*