How do Sudden Stops of Capital Flows Affect Currency Crises in Asia?

Sudden stops can be characterized by sharp reversals in capital inflows, large declines in output, and steep collapses in real asset prices (Mendoza and Smith, 2009). In almost all recent crises, capital account reversals amounting to more than 10% of an afflicted country’s GDP have occurred (Calvo and Reinhart, 1999 and Nabli, 1999). More specifically, reversals in capital flows to emerging market countries in the 1990s and early 2000s exerted a substantial influence on the relevant economies affected even leading to financial crises, while, on the whole, international capital reversal has been absent in the case of advanced countries. Another characteristic of recent crises is the swiftness and the magnitude of the crises itself and its impact on asset prices and the exchange rate. The objective of this paper is to examine the role of sudden stops in causing a currency crisis in Asia. Moreover, the herding behaviors on capital flows will be analyzed in Asian emerging countries. So the probability of the occurring a currency crisis after sudden stop in capital inflows caused by herding behaviors will be estimated by a Logit regression for Asian countries during 1970-2011. In general, the econometric results have indicated that fluctuations in international capital flow, leading to sudden stops, have been significant determinants of currency risk during the recent currency crises.