Intertemporal current account balance and the East Asian currency crises

Under the assumption that the balance of the current account must satisfy the expected intertemporal balance, this paper seeks to establish a precondition for the recent currency crises in East Asian countries. Whenever current policy violates the expected intertemporal balance, it is argued that future policy changes (possibly including the exchange rate regime) are anticipated. Using Trehan and Walsh's [1991] result that nonstationarity of the change of assets is evidence of a violation of the expected intertemporal balance, this paper calculates the augmented Dickey-Fuller statistics of the current account prior to the East Asian currency crises. In each of these crises, there is evidence of a persistent violation of intertemporal balance prior to the crisis. There is also evidence of countries being affected by the plight of their neighbors. Their currencies depreciated even though it was not necessary. Copyright International Atlantic Economic Society 1999