TMacroeconomic Weakness
A distinguishing feature of the Asian crises is the lack of widespread macroeconomic problems prior to the crisis. While capital inflows to Asia surged in the 1990s, most of the economies in question managed to avoid the substantial exchange rate appreciations that have often been associated with large capital inflows, particularly in Latin America. Through a combination of tight fiscal policy and monetary policies aimed at sterilizing the monetary impact of these inflows, they generally avoided large appreciations against the U.S. dollar, the main currency against which they pegged their exchange rates. Policies of pegging largely to the relatively strong dollar did, however, lead to some appreciation against the yen in some of the countries since 1996, particularly Thailand and the Philippines.
Movements in the real exchange rate relative to trend are, of course, imperfect measures of real exchange rate overvaluation. An exchange rate that is not appreciated relative to some benchmark may be overvalued if the fundamentals determining the equilibrium real exchange rate have changed? If, for example, the capital inflows that supported a given real exchange rate reserve, the exchange rate would need to depreciate, and the previous rate might be considered overvalued.
There are grounds, nonetheless, for holding that deviations in the real exchange rate from trend or long-term levels are good measure of overvaluation in some contexts. A strong regularity in the analysis of leading indicators of currency crisis is that these sorts of measures of overvaluation are associated with subsequent currency crises. More generally, periods of exchange rate overvaluation measured as deviations from purchasing-power-parity tend to be followed by sharp real, and usually also nominal, depreciation.
Read more: http://www.ukessays.com/essays/economics/the-asian-financial-crisis-and-economic-meltdown-economics-essay.php#ixzz3fELptiVV