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Authors:

• David COOK
  Hong Kong University of Science and Technology

• Michael B. DEVEREUX
  University of British Columbia

This paper conducts a quantitative investigation of the East Asian crisis. The paper asks to what degree the qualitative and quantitative aspects of the crisis can be accounted for by observed changes in the country risk-premium on external borrowing. We calibrate a quantitative sticky-price dynamic general equilibrium model of a small open economy to match the features of three East Asian economies: Thailand, Korea, and Malaysia. We identify a shock to the country-risk premium using published data from international bond markets and identify short-run monetary using observed domestic interest rates. We find that the modeled response to the observed increase in external interest rates substantially matches macroeconomic data on prices and quantities at the aggregate and sectoral level. The model has more difficulty explaining the large exchange rate devaluations that occurred in those economies.